Annual Report 2009 Annual Report

Delek Group Ltd 7, Giborei Israel St., P.O.B 8464, Industrial Zone South, Netanya 42504, Israel Tel: 972 9 8638444, 972 9 8638555 Fax: 972 9 8854955 www.delek-group.com ANNUAL REPORT 2009

ANNUAL REPORT 2009

DelekDelek Group Group Ltd Ltd 7,7, Giborei Giborei Israel Israel St., St., P.O.B P.O.B 8464, 8464, Industrial Industrial Zone Zone South, South, Netanya Netanya 42504, 42504, Israel Israel Tel:Tel: 972 972 9 98638444, 8638444, 972 972 9 98638555 8638555 Fax: Fax: 972 972 9 98854955 8854955 www.delek-group.comwww.delek-group.com IMPORTANT

This document is an unofficial translation for convenience only of the Hebrew original of December 31, 2009 financial report of Delek Group Ltd. that was submitted to the Tel-Aviv Stock Exchange and the Israeli Securities Authority on March 26, 2009.

The Hebrew version submitted to the TASE and the Israeli Securities Authority shall be the sole binding legal version.

Table of Contents:

Chapter A Corporate Description

Chapter B Board of Directors Report on the State of the Company’s Affairs

Chapter C Financial Statements for December 31, 2009

Chapter D Additional Information on the Corporation

Description of the Corporation's Business

Table of Contents

Part One – Description of the General Development of the Company's Business...... 2 1.1 Company operations and business development...... 3 1.2 Segments of Operation ...... 7 1.3 Equity investments in the Company and transactions in its shares...... 7 1.4 Distribution of dividends ...... 9 Part Two – Other Information ...... 11 1.5 Financial information related to the Group's segments of operation ...... 11 1.6 General environment and impact of external factors...... 14 Part Three – Description of the Corporation's Business by Segment of Operation...... 18 1.7 Refining and Fuels in the USA ...... 18 1.8 Fuel Products Segment in Israel ...... 52 1.9 The Fuel Products Segment in Europe ...... 91 1.10 The Automotive Segment...... 107 1.11 Energy ...... 130 1.12 Insurance and Finance in Israel ...... 185 1.13 Insurance segment in the U.S...... 231 1.14 Additional operations...... 251 Part Four – Matters Relating to Operations of the Company as a Whole...... 264 1.15 Property, plant and equipment ...... 264 1.16 Human resources ...... 264 1.17 Finance...... 265 1.18 Taxation...... 267 1.19 Company guarantees and liens...... 267 1.20 Legal proceedings and insurance ...... 268 1.21 Business goals and strategy ...... 268 1.22 Financial details concerning geographic regions...... 268 1.23 Discussion of risk factors...... 268

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Part One – Description of the General Development of the Company's Business

Key:

In this report the following abbreviations have the following meanings: Company or Delek Group - Delek Group Ltd. IDE - IDE Technologies Ltd Excellence - Excellence Investments Ltd. Gadot - Gadot Biochemical Industries Ltd. Delek Ashkelon - I.P.P. Delek Ashkelon Ltd. Delek Europe - Delek Europe Holdings Ltd. Delek Energy - Delek Energy Systems Ltd. Delek Benelux - Delek Benelux B.V. Delek Investments - Delek Investments and Properties Ltd. Delek Refining - Delek Refining Inc. Delek Israel - Delek The Israel Fuel Corporation Ltd. Delek Real Estate - Delek Real Estate Ltd. Delek Petroleum - Delek Petroleum Ltd. Delek Infrastructure - Delek Infrastructure Ltd. Delek Automotive - Delek Automotive Systems Ltd. Delek Capital - Delek Capital Ltd. Delek USA - Delek US Holdings Inc. HOT - HOT Cable Media Systems Ltd. The Phoenix - The Phoenix Holdings Ltd. Republic - Republic Companies Group Inc. Avner Partnership - Avner Oil and Gas Exploration – Limited Partnership Delek Drilling Partnership - Delek Drilling – Limited Partnership

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1.1 Company operations and business development

1.1.1 Delek Group Ltd. ( "the Company") is a holding company that controls numerous corporations (the Company and the companies it controls are hereinafter referred to, for the sake of convenience as "the Group" or "Delek Group"). 1.1.2 The Company was incorporated on October 26, 1999 as a public company1. 1.1.3 The following chart illustrates the Group's major holdings as of March 25, 2010:

1 The Company was incorporated as part of reorganization of the Group in 1999, in which Group operations were separated and divided into three main subsidiaries, with the Company established as a parent company. Prior to the reorganization, Group operations were included under Delek The Israel Fuel Corporation Ltd., which was incorporated on December 12, 1951 and is currently, following the reorganization, responsible for the fuel product segment in Israel.

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DELEK GROUP LTD.

100% 100% 94%

Delek Capital Delek Investments and Properties Delek Petroleum

26.7% 28.6% 54.9% 79.7% 64% 100% 80% 77.4% 97%

Delek Delek Gadot Delek the 3% Delek Delek Phoenix Automotive Energy Biochemical Israel Fuel Infrastru-cture Hungary Ltd. Systems Systems Industries Corporation

20% 100% 73.4% 100% 65.9% 100% **58.7% **62.3% 50% 100%

Delek Europe Held Delek Drilling IDE Delek Avner Oil Delek companies in Republic Excellence – Limited Technologies Delek USA Motors Exploration Ashkelon 100% fuel segment Partnership Ltd. in Israel Delek Benelux 100% 100%

MAPCO Express (the Fuel ** The indicated holdings in Delek Drilling and Avner Partnership are cumulative holdings of Delek Delek Investments, which holds approx. 89% of the stock in Delek Energy, and of Delek Energy. For details of Product Refinery the holdings see par. 1.12 below. Segment in the *** Including holdings for subsidiaries. USA)

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1.1.4 The Delek Group is one of the largest, most dynamic investment companies operating in Israel. The Group is holdings company with a variety of investments in Israel and abroad, with operations including, inter alia, refining, gas stations, energy, automotive, finance and insurance, and biochemicals. In recent years the Group’s operations have expanded considerably, both in the energy segment which was initially the core of Group operations, and in other segments. In the course of its business during 2008 – 2009 and proximate to the report date, the Group's material developments were as follows: 2008 Refining and fuel products in the U.S.: On November 20, 2008 an explosion at the Tyler refinery resulted in an outbreak of fire. Two employees were killed and others were injured. The refinery was shut down following the explosion. As a result of this incident, Delek Refining was unable to supply its customers with those products that they usually purchase from the refinery. In 2009, reconstruction of the refinery was completed, and as of this date, the refinery has resumed normal operations. For more information relating to the explosion and its implications, including insurance coverage, see section 1.7.2(B). below. 2009 Energy segment: In February 2009, drilling at the Tamar-1 site off the coast of Haifa ended with the discovery of commercial gas quantities. Delek Drilling and Avner ("the Partnership") each have a 15.6% stake in the drilling. The drilling at Tamar-1 was executed at a water depth of about 1,680 m. and reached a final depth of about 4,900 m. In August 2009, the partnership announced that according to an independent evaluation carried out by NSAI, the average economic potential of the natural gas reserves in the Tamar field is approx. 7.7 TCF (approx. 218 BCM). In august 2009, the partnerships announced their approval for the operators of the Tamar and Dalit projects to sign contracts for the purchase of equipment and services, which may be required for development of the Tamar and Dalit natural gas fields at a total amount of approx. USD 230 million (for all partners). In April 2009, production tests carried out at the Dalit-1 drill site were successfully completed. During the production tests, natural gas flowed at a maximum rate of 33 million cubic feet per day (Mmcf/D). The flow rate was restricted by the equipment used for the production tests, so that production could not be increased beyond the aforementioned rate. The operator, Noble Energy Mediterranean Ltd. ("the Operator"), relying on the test results, estimates that after completion of the drilling to production, it will be able to produce natural gas at a rate of more than 200 million cubic feet per day (Mmcf/D). After analyzing the information obtained during the drilling and production tests, the Operator estimates that the average economic potential of the natural gas reserves in the structure is about 500 BCF (about 14.2 BCM), and that the discovery is of commercial scope. For more information regarding the Tamar-1 and Dalit-1 drill sites, see section 1.11.3 to the report. During 2009 and as of the report date, the partners in the Tamar and Dalit licenses (the "Tamar Project") signed non-binding letters of intent for the supply of gas with the Israel Electric Corporation, Dalia Power Energies Ltd. and Southern Power Plant Ltd. and DSI Dimona Silica Industries Ltd. For more information regarding these letters of intent, see section 1.11.26(F) to the report. Insurance and finance in Israel: On June 14, 2009, The Phoenix signed a settlement agreement with Messrs. Aharon Biram and Gil and Esther Deutsch (in this section: "the Sellers") in relation to the sale of Excellence shares held by the Sellers to The Phoenix. On August 25, 2009 the transaction for the sale of the Sellers' shares (to a total amount of 40.88%) in two installments, was completed. On August 25, 2009, The Phoenix acquired approx. 20.44% of all Excellence shares, constituting the "first installment", for approx. NIS 342.6 million. The total consideration to be paid for the shares shall range from NIS 620 million to a maximum amount of NIS 730 million, linked to the Israeli CPI. For more information and details, see Note 14 to the financial statements. On November 24, 2009 The Phoenix, through The Phoenix Investments, acquired 779,471 shares in Excellence, constituting approx. 4.58% of Excellence's issued capital, for a total consideration of approx. NIS 43.3 million. Following this acquisition, The Phoenix holds a 65.02% stake in Excellence's issued and paid-in capital. Distribution of Delek Real Estate shares as a dividend in kind: On October 29, 2008, the Company's board of directors resolved to distribute all or the majority of Delek Real Estate shares held by the Company to the Company's shareholders. On March 31, 2009, the Delek Group

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announced the distribution of Delek Real Estate shares as a dividend in kind on May 3, 2009. The distribution was carried out in such a manner that each of the Company's shareholders received 8.8 shares in Delek Real Estate for each share in the Company. Following the distribution, the Company retained a 5% stake in Delek Real Estate's shares, and real estate activities are no longer included as a segment of operation in the Company's statements. For more information regarding exposure to Delek Real Estate's activities in respect of loans issued to Delek Real Estate, see section 1.14.7 to the report. 2010 Fuel products segment in Europe: In February 2010, Delek Europe BV submitted a binding offer for the acquisition of BP France SA's ( "BP") fuel marketing operations in France, including 416 BP- branded fuelling stations, a nation-wide chain of convenience stores, and holdings in 3 terminals ( "the Marketing Operations"). The transaction includes the receipt of an exclusive usage license to the BP brand in the fuelling station chain in France. In consideration for the acquisition of the marketing operations, Delek Europe offered a sum of approx. EUR 180 million before working capital adjustment and before additional adjustments, as may be upon completion of the transaction. Upon submitting the offer, Delek Europe paid an advance to the amount of EUR 10 million, for receiving exclusivity from BP to conduct negotiations for completion of the marketing operations acquisition transaction. The offer is valid until October 15, 2010. For details, see section 1.9.29 to the report. During the period 2008-2010 (to the report date), the Group raised considerable capital and debt. The Group's major capital-raising activities are described in the chapters on the operating segments, and include the following: 2008 • In February 2008, The Phoenix raised approx. NIS 200 million in an offering of deferred liabilities deeds to institutional investors. • In July 2008, Delek Petroleum raised approx. NIS 420 million in a public offering of debentures. 2009 • In May 2009, Delek Israel raised approx. NIS 111 million in a public offering of debentures. • In July 2009, Delek Israel raised approx. NIS 814 million in a public offering of debentures. • In July 2009, the Company raised approx. NIS 308 million in a private offering of debentures to institutional investors. • In July 2009, The Phoenix raised approx. NIS 125.5 million in a share offering executed as a rights offering. • In September 2009, The Phoenix raised approx. NIS 500 million through a designated subsidiary, which held a public offering of liability certificates. • In September 2009, the Company raised approx. NIS 350 million in a public offering of debentures to warrants. • In October 2009, Delek Energy raised approx. NIS 300 million in a public offering of debentures. • In November 2009, the Company raised approx. NIS 818 million in a public offering of debentures. • In November 2009, Delek Energy carried out a barter offer whereby it acquired 247,926,781 participation units in the limited partner's rights in the Avner Oil Exploration limited partnership (which constitutes approx. 7.43% of all participation units), in return for issuing a total of 393,535 ordinary shares in Delek Energy. Following this issuing, the Company recorded profits to the amount of NIS 200 million. 2010 • In January 2010, Delek Energy raised approx. NIS 400 million in a public offering of debentures.

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1.2 Segments of Operation

A. The Group operates in the following seven segments: B. Refining in the U.S. – This segment includes holdings in an oil refinery and crude oil pipelines as well as the marketing of fuel products, and operation of gas stations and convenience stores in the United States. C. Fuel Products in Israel – This segment includes sales of fuels and oils, the operation of gas stations with on-site convenience stores, and the provision of fuel storage and supply services in Israel. D. Fuel Products in Europe – This segment includes sales of fuels and oils and the operation of gas stations with on-site convenience stores in the Benelux countries. E. Energy – This segment includes the Group's operations in the production of natural gas and in oil and gas exploration. F. Automotive – This segment includes the import, marketing and sale in Israel of Mazda and Ford cars and commercial vehicles. G. Insurance and Finance in Israel – This segment includes a 55.34% holding in The Phoenix. H. Insurance in the U.S. – This segment includes insurance operations in Texas, Louisiana, Oklahoma and New Mexico, through the Republic insurance company. 1.2.2 In addition, Delek Group operates in various areas that are not covered by the above segments. These include, primarily, Gadot's biochemical operations, in which the Group holds about 64%, a 50% holding in IDE desalination operations; other investments in infrastructure, holdings in technology companies, and other financial holdings (see section 1.14 below).

1.3 Equity investments in the Company and transactions in its shares

1.3.1 To the best of the Company's knowledge, in 2008-2009 until shortly prior to the report date, the following investments were made in the Company's equity: % of issued Equity investment Date Type of transaction capital in NIS millions* Q1/2008 Warrants exercised for shares 0.12% 9 Q1/2008 Purchase of Company shares 0.05% 5 Q3/2008 Purchase of Company shares 1.67% 78 Q4/2008 Purchase of Company shares 2.87% 22 Q1/2009 Purchase of Company shares 2.91% 1 Q2/2009 Purchase of Company shares (carried out by 0.19% 10 Delek Investments and Property Ltd.) Q2/2009 Purchase of Company shares (by the Company) 0.04% 2 Q2/2009 Debentures converted to shares 0.03 1

Q1/2010 Warrants exercised for shares 0 0.1

1.3.2 To the best of the Company's knowledge, in 2008-2009 until shortly prior to the reporting date, the following material transactions were made by Company stakeholders, outside of the stock exchange: Company value derived % of Price per from Stakeholder Type of issued share in Consideration transaction Date name transaction capital NIS in NIS millions (NIS millions) February 4, 2008 Yitzchak Sharon Purchase 0.12 683 9.9 7,968 (Tshuva) February 6, 2008 Yitzchak Sharon Purchase 0.10 673.2 8.1 7,854 (Tshuva) February 7, 2008 Yitzchak Sharon Purchase 0.10 673.25 7.8 7,621 (Tshuva) February 27, 2008 Yitzchak Sharon Purchase 0.14 615.96 9.9 7,191

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Company value derived % of Price per from Stakeholder Type of issued share in Consideration transaction Date name transaction capital NIS in NIS millions (NIS millions) (Tshuva) April 17, 2008 Yitzchak Sharon Purchase 0.18 567.80 11.9 6,633 (Tshuva) June 30, 2008 Yitzchak Sharon Purchase 0.67 515.1 40.2 6,020 (Tshuva) July 2, 2008 Yitzchak Sharon Purchase 0.3 510 17.8 5,959 (Tshuva) July 3, 2008 Yitzchak Sharon Purchase 0.34 510 20.4 5,959 (Tshuva) July 6, 2008 Yitzchak Sharon Purchase 0.34 500 20 5,843 (Tshuva) July 10, 2008 Yitzchak Sharon Purchase 0.35 485 19.9 5,666 (Tshuva) July 13, 2008 Yitzchak Sharon Purchase 0.1 470 5.6 5,492 (Tshuva) July 13, 2008 Yitzchak Sharon Purchase 0.05 461 2.5 5,387 (Tshuva) July 14, 2008 Yitzchak Sharon Purchase 0.02 460.5 1.2 5,381 (Tshuva) July 15, 2008 Yitzchak Sharon Purchase 0.12 438.2 6.3 5,121 (Tshuva) December 1, 2008 Yitzchak Sharon Purchase 0.19 159.7 3.5 1,867 (Tshuva) December 2, 2008 Yitzchak Sharon Purchase 0.15 156.6 2.7 1,830 (Tshuva) December 3, 2008 Yitzchak Sharon Purchase 0.11 156 2 1,822 (Tshuva) December 9, 2008 Yitzchak Sharon Purchase 0.02 187.4 0.5 2,189 (Tshuva) December 10, 2008 Yitzchak Sharon Purchase 0.02 185.9 0.5 2,172 (Tshuva) December 11, 2008 Yitzchak Sharon Purchase 0.02 187.3 0.5 2,188 (Tshuva) December 14, 2008 Yitzchak Sharon Purchase 0.02 175.4 0.5 2,049 (Tshuva) December 21, 2008 Yitzchak Sharon Purchase 0.2 130 3 1,519 (Tshuva) December 22, 2008 Yitzchak Sharon Purchase 0.2 132 3 1,544 (Tshuva) December 23, 2008 Yitzchak Sharon Purchase 0.17 132 2.6 1,544 (Tshuva) December 24, 2008 Yitzchak Sharon Purchase 1.36 113 1.8 1,320 (Tshuva) December 28, 2008 Yitzchak Sharon Purchase 0.11 111 1.4 1,272 (Tshuva) December 29, 2008 Yitzchak Sharon Purchase 0.06 112 0.7 1,312 (Tshuva) December 30, 2008 Yitzchak Sharon Purchase 0.18 116 2.4 1,355 (Tshuva) December 30, 2008 Yitzchak Sharon Purchase 0.13 118 1.6 1,379 (Tshuva) December 31, 2008 Yitzchak Sharon Purchase 0.48 124 7 1,448

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• Yitzhak Sharon (Tshuva) through companies under his full ownership and control.

1.4 Distribution of dividends

1.4.1 Distribution of dividends in the past two years Dividends declared by the Company in 2008-2009 until shortly prior to the report date: Dividend per share Total dividend Declaration date Payout date (NIS) (NIS millions) March 30, 2008 April 29, 2008 5.47 approximately 64 May 29, 2008 July 20, 2008 6.421 approximately 75 August 31, 2008 September 25, 2008 2.161 approximately 25 May 27, 2009 July 2, 2009 6.3472 approximately 72 August 30, 2009 September 24, 2009 9.25 approximately 105 November 30, 2009 January 5, 2010 2.9 approximately 33 December 28, 2009 January 18, 2010 13.223 approximately 150

For 2008, dividends in a total sum of approx. NIS 100 million were distributed. For 2009, dividends in a total sum of approx. NIS 360 million were distributed. As aforesaid, on March 31, 2009 the Company declared the distribution of Delek Real Estate shares as a dividend in kind, which distribution took place on May 3, 2009. Each shareholder in the Company received shares in Delek Real Estate from the Company, in exact proportion to the total shares distributed in Delek Real Estate as the proportion of each shareholder's holdings in the Company's shares on the effective date (approx. 8.8 shares in Delek Real Estate for each share in the Company). For more information on the distribution of dividends, see Chapter A(2) and Chapter G to the Directors' Report. 1.4.2 Dividend distribution policy On March 30, 2005 the Board of Directors of the Company decided on a dividend policy. Accordingly, the Company will strive to distribute approximately 50% of its annual profit (post-tax) each year. This decision is subject to the following conditions: A. The Company's Board of Directors will decide from time to time on the distribution of a dividend, and its decision will be made pursuant to the provisions and limitations of the law. B. The Board's decision on the amount of the distribution will depend on the Company's financing requirements, its liabilities, liquidity and investment plan, as may be from time to time.

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C. The Board's decision on the amount of the distribution will be made so that the dividend distribution will not harm the Company’s third party obligations, including to its debenture holders and the banks. 1.4.3 Limitations on the distribution of dividends Pursuant to the provisions of the credit facility agreement with a bank, Delek Group is required to obtain prior approval when distributing a dividend that exceeds 60% of its annual net profit. Under the agreement, this limitation applies commencing from the end of 2009. For further information relating to the limitations on distribution of dividend applicable to the Group's companies, see the description of the various areas of operation below. The Company is studying the applicability of Section 309 to the Companies Law as regards the purchase of shares by Excellence's exchange-traded notes companies. These companies purchase and sell Company shares as part of their prospectus obligations to monitor the share indices in which the Company is included. Section 309 to the Companies Law dictates that a subsidiary or another corporation controlled by the parent company are entitled to purchase shares in the parent company or securities which are convertible or exercisable for shares in the parent company, to the same extent that the parent company is entitled to carry out a distribution, provided that the subsidiary's board of directors or the management of the purchasing corporation has determined that had the purchase of the shares or the securities convertible or exercisable for shares been carried out by the parent company, such action would have constituted permissible distribution. Although both materially and practically it is clear that the purchase of shares by the exchange- traded note companies should not be equated with the distribution of dividends and is subject to the distribution tests, the Company is studying the matter in order to find a legal solution in light of the phrasing of Section 309 to the Companies Law. Failure to find a solution as aforesaid may detract from the surplus for distribution and limit the distribution of dividends in the future.

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Part Two – Other Information

1.5 Financial information related to the Group's segments of operation

The following tables detail financial information related to the Group's segments of operation:

Refining and Insurance 2009 fuel products Delek and finance Insurance in Adjustments to (NIS millions) in the U.S. Delek Israel Europe Energy Automotive in Israel the U.S. consolidated Consolidated Revenues from 10,413 4,286 10,681 449 4,743 10,483 1,668 724 43,447 Revenues externals (NIS Revenues from ------thousands) other segments Total 10,413 4,286 10,681 449 4,743 10,483 1,668 724 43,447 Costs constituting ------revenues for another segment Total attributed Other costs 10,224 4,056 10,584 184 4,283 10,183 1,591 810 41,915 costs Total 10,224 4,056 10,584 184 4,283 10,183 1,591 810 41,915 (NIS Fixed costs thousands) attributed to 1,172 496 585 ------segment1 Variable costs attributed to 9,052 3,560 9,999 1842 4,2833 - - - - segment Profit from ongoing operations attributed to parent company 140 179 97 265 266 166 77 (101) 1,089 owners Equity in profit from ongoing operations attributed to minority 49 51 - - 194 134 - 15 443 rights Total assets attributed to segment 3,831 3,692 3,649 1,853 2,338 54,504 5,082 9,407 84,356 Total liabilities attributed to 1,029 833 1,451 171 1,275 49,823 4,004 21,182 79,768 segment

2 The vast majority of costs are variable costs due mainly to the purchase of vehicles and spare parts. Therefore, the Company did not state the fixed costs separately. 3 The majority of these costs are variable costs which change according to gas and oil production output.

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2008 (NIS millions

Refining and Insurance 2008 fuel products Delek Delek and finance Insurance in Real Adjustments to (NIS Millions) in the U.S. Israel Europe Energy Automotive in Israel the U.S. estate consolidated Consolidated Revenues from 17,118 5,813 14,660 447 4,770 1,201 1,490 - 741 46,240 Revenues externals (NIS Revenues from ------thousands) other segments Total 17,118 5,813 14,660 447 4,770 1,201 1,490 - 741 46,240 Costs constituting revenues for ------another segment Total Other costs 16,930 5,591 14,531 207 3,898 1,551 1,629 - 907 45,244 attributed Total 16,930 5,591 14,531 207 3,898 1,551 1,629 - 907 45,244 costs (NIS thousands) Fixed costs attributed to 988 458 599 ------segment1 Variable costs attributed to 15,942 5,133 13,932 2072 3,8983 - - - - - segment Profit from ongoing operations attributed to parent company 138 189 129 240 503 (189) (139) - (170) 701 owners Equity in profit from ongoing operations attributed to minority 50 33 - - 369 (161) - - 4 295 rights Total assets attributed to 3,801 3,622 3,767 1,899 2,001 28,802 5,300 21,068 6,369 76,629 segment Total liabilities attributed to 384 596 1,094 228 960 26,536 3,634 1,211 37,623 72,266 segment

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2007 (NIS millions)

2007 Refining and Delek Delek Energy Automotive Insurance Insurance in Real Adjustments to Consolidated (NIS millions) fuel products Israel Europe and finance the U.S. estate consolidated in the U.S. in Israel Revenues from 16,794 4,837 3,715 352 4,630 6,794 1,455 - 541 39,118 externals Revenues (NIS Revenues from thousands) ------other segments Total 16,794 4,837 3,715 352 4,630 6,794 1,455 - 541 39,118 Costs constituting revenues for ------another segment Total attributed Other costs 16,144 4,579 3,646 217 3,960 6,218 1,239 - 479 - costs (NIS Total 16,144 4,579 3,646 217 3,960 6,218 1,239 - 479 - thousands) Fixed costs attributed to 1,042 377 478 ------segment1 Variable costs attributed to 14,951 4,202 3,168 2172 3,9603 - - - - - segment Profit from ongoing operations attributed to parent company 477 212 69 135 390 320 216 - 50 1,876 owners Equity in profit from ongoing operations attributed to minority 173 39 - - 280 256 - - 12 760 rights Total assets attributed to segment 4,204 3,042 3,290 1,278 1,507 32,967 4,773 26,390 7,630 85,081 Total liabilities attributed to 1,108 530 830 188 930 29,174 3,078 2,567 37,493 75,898 segment

For details about the main developments in the financial data, see the Board of Directors' explanations regarding the state of the Corporation's business.

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1.6 General environment and impact of external factors

The Group is a holdings and management company that controls a large number of companies with a range of investments in Israel and abroad, in energy, infrastructure and desalination, finance and insurance, automotive, biochemicals and communications. The financial data and results of operations of the Company are influenced by the financial data and results of its investee companies, as well as by the Company's sale or purchase of these holdings. The Company's cash flow is affected, among other things, by dividends and management fees distributed by its investee companies, by the proceeds earned from realization of the Company's holdings in such companies, by the Company's ability to raise foreign financing that depends, among other things, on the value of its holdings, and by investments made by the Group and by dividends it distributes to its shareholders. Market developments and fluctuations may have a material effect on the results of the Delek Group and its investee companies, on their liquidity, the valuation of their assets, their ability to realize such assets, the state of their business, their financial criteria, their credit rating, their ability to distribute dividends, and their ability to raise funds to finance their ongoing operations and their long-term operations, as well as the terms of such financing. The Company and several of its investee companies are subject to restrictions on their operations imposed by law or by order of various regulatory bodies, such as anti-trust provisions, provisions relating to the obligation to tender, provisions relating to insurance companies, provident funds and retirement funds, provisions relating to the supervision of product and service prices, and communications-related provisions. Furthermore, the Group's ability to raise funding is influenced, among other things, by relevant regulations, such as the Proper Conduct of Banking Business Directives (see below), as well as non-bank credit regulations. As regards the latter, future regulation, inter alia pursuant to the recommendations submitted by the Hodak committee, may influence the terms and prices of possible debt raisings by the Group in Israel. The Company and several of its investee companies are affected by the Proper Conduct of Banking Business Regulations issued by the Supervisor of Banks in Israel. These regulations include, among other things, restrictions on the scope of the loans that Israeli banks can grant to "single borrower", and the six larges borrowers and the largest "group of borrowers" in the banking corporation (as these terms are defined in the aforesaid regulations). Accordingly, the scope of the loans issued to the Group's companies and the controlling shareholder in the Company may, under certain circumstances, affect the ability of the Group's companies to loan additional amounts from banks in Israel. The Company and its investee companies are also affected by the Government of Israel's policy in various matters (e.g. – monetary policies), and by the requirements of authorities monitoring environmental quality. Furthermore, significant increases in the minimum wage in Israel, other material changes to the labor laws applicable in Israel or strikes or industrial unrest can affect the financial results of the Company and its investee companies. Some of the investee companies maintain operations abroad, market products or services outside of Israel or have securities traded abroad. These companies are affected by legislative arrangements and foreign regulatory arrangements, and are exposed to changes in various currency exchange rates. Below is a brief description of trends, events and developments in the Company’s macroeconomic environment that have, or are expected to have, an impact on the Group.1 1.6.1 Developments in the Israeli economy The Group is part of the economy of Israel, whose economic, political and security situation has ramifications for the Group's operations in various fields. In 2008, the global financial crisis began to have a decisive impact on the Israeli economy, after several years of rapid growth. 2009 began with grave concerns for a financial crisis that would lead to a prolonged global recession. However, the enactment of unprecedented measures and cooperation among the leading global economies, aimed at accelerating growth, have proven

1 The data in this section is based primarily on official publications, including the following: preliminary estimates of the national accounts for 2009, Central Bureau of Statistics, December 31, 2009; Q4 2009 Inflation Report, Bank of Israel; Recent Economic Developments, September-December 2009, Bank of Israel.

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themselves effective, and during the year it seemed that the economic downturn in the developing markets had successfully been stopped, and emerging markets began showing signs of renewed growth. In Israel too, the forecasts for a deep recession did not materialize. This, thanks to the Israeli economy's strong starting point as regards budget deficit, surplus in the current budget, high foreign currency reserves, and pre-emptive regulation which prevented a crisis in the banking system. After a short recession period of two quarters, Q2/2009 saw the Israeli economy achieve a modest growth rate of approx. 1% (in annual terms), which was accelerated to approx. 3% in Q3 and 4.3% in Q4. According to Israel Central Bureau of Statistics data, in 2009 Israel's GDP grew by about 0.5% (a reduction of approx. 1.3% in product per capita) – an increase of approx. 3% in Q3/2009, following an increase of 1.1% in Q2/2009, and a decrease of 3.2% in Q1/2009 (based on data adjusted for seasonal fluctuations1). The reduction in product per capita observed in Israel in 2009 has also been observed in other countries, although at a higher rate. According to OECD data, product per capita in its member countries decreased by an average 4% in 2009. In addition, expenditure on private consumption increased by 1.1% in 2009, following an increase of 3.6% in 2008 (but due to population growth, per capita expenditure for private consumption decreased by 0.6%). Furthermore, 2009 saw a 1.7% increase in public consumption expenditure, following an increase of approx. 2.1% in public consumption expenditure in 2008. On the other hand, 2009 was characterized by a striking decrease of 6.6% in investments in fixed assets, after an increase of 4.4% in 2008. In addition, exports of goods and services fell by 13.2% after a 5.2% increase in 2008, with business sector product also registering a slight decrease of 0.4%. It seems that these data are due to the economic crisis, which led to a deep recession in the final quarter of 2008 and the first half of 2009. The slowdown in activities was also expressed in a significant reduction of global trade volumes due to decreased demand. In light of this situation, governments and central banks around the world enacted measures aimed at stabilizing their economies. The third quarter of 2009 saw a recovery in real activity, with governments and banks continuing to implement measures for fiscal expansion. In Israel, almost no economic stimulus plans were enacted by the government. From May 2009, tax revenues began to grow. Accordingly, although at the start of 2009 the State's deficit was estimated at approx. 6% of GDP, at year's end it seems that the actual deficit will be lower, at about 5%. In this respect, Israel differs from other developed countries, where government deficits have increased significantly following the governments' need to raise the liquidity of large-scale companies and of the banking system, so as to prevent their collapse. Israel also differs from other countries in the world in its real estate market. Globally, the real estate segment constituted one of the sources for the crisis due to bubble prices and very high leveraging by companies and individuals to acquire properties. In Israel 2009 most areas of the country actually saw significant increases in apartment prices (10-15%). This was due to the low cost of mortgages, the release of pent-up demand which were waiting for the uncertainty to dissipate, and from demand for apartments by investors looking for solid and alternative investments options, especially in view of the low interest rate all through the year. The Q4 Inflation Report published by the Bank of Israel further reinforces the assessment that a sharp turnaround has occurred in the economic and financial environment in Israel in the second half of 2009. This turnaround is evident in the capital market: since the start of the recovery in real estate prices in March 2009, share and debenture indices have risen sharply, and reached record levels in Q4/2009 – their average pre-crisis levels. According to the inflation report, it seems that economic recovery is well underway in Israel. The growth in GDP in Q4/2009 (expected to increase by more than 4% compared to Q3) marks the establishment of growth in real operations, the beginnings of which were already apparent in Q2/2009. The growth in GDP during the year, in contradiction of early forecasts and the decrease in the unemployment rate in the final quarter of the year, which was in contrast to persistent increases in unemployment since the first half of 2008, are also signs of improved economic activity and support the estimates for more established growth trends. However, it should be remembered that in 2009 leading international banks continued to record losses following defaults by households, large financial organizations became insolvent or were nationalized, numerous companies both in Israel and abroad initiated debt- settlement proceedings, and the global financial system is still in a state of instability. The shortage of credit facilities persists, as does the policy of stiffer criteria for obtaining credit in Israel and abroad. Therefore, it is not possible to estimate the length of the global and local economic recovery, and there is no certainty that we shall not witness a recurring deterioration of the crisis which began in 2008.

1 The data adjusted for seasonal fluctuations are obtained by deducting the impact of seasons, holidays and workdays from the original data.

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Employment and unemployment – The job market inherently tends to have a delayed response to changes in economic conditions. However, here too, the first signs of change are apparent, and it seems that the recovery in real operations has begun making itself felt in the job market. The economic crisis towards the end of 2008 created a slowdown in the job market. In October and November of 2008, the number of workers laid off exceeded the number of new hires, for the first time since 2003. The rise in unemployment continued into 2009, but in the second and third quarters of the year, the job market in Israel began showing signs of stability, and even a slight decrease in the unemployment rate. If 2009 and the beginning of 2009 were characterized by increased unemployment up to a rate of 8.1%, from mid-Q3/2009 the job market started showing signs of stability, and even a slight decrease in unemployment to a rate of 7.7% at year's end. According to a survey carried out by the Bank of Israel, it seems that during Q3/2009, the demand for workers grew, for the first time after a year of decreased demand. A personnel survey found that the number of jobseekers declined in Q3/2009 by approx. 3,000, while the number of workers grew by approx. 18,600. This increase in the number of workers was mainly concentrated in the service provider segment, and reflected a sharp increase in the number of full-time employees, and a reduction in the number of part-time employees. The turnaround in the job market was further reflected in increased salaries. The average real salary for employees grew in Q3/2009 by 0.6% compared to Q2, with the banking, insurance and finance industry being the only segment to show salary increases (of approx. 6.9%). These data are significantly better than those seen in the United States and in Europe, where unemployment exceeded 10%. According to the aforesaid, the Bank of Israel reduced its unemployment forecast for the end of 2010 to 7.1%. 1.6.2 Exchange rate, inflation and interest Exchange rate – In general, the surplus that has existed in the current budget in Israel since 2003 strengthens the New Israel Shekel. The Bank of Israel sought to keep Israeli exports competitive, and during 2009 purchased substantial amounts of foreign currency, even after announcing in August 2009 of the cessation of its daily purchasing policy of USD 100 million per day, which it had been implementing since the end of 2008. These purchases caused Israel's foreign currency reserves to reach record levels, and in November 2009, these reserves totaled USD 61.5 billion. During 2009, the USD/NIS exchange rate fluctuated greatly, with a sharp revaluation of the dollar in the second quarter of the year which saw the dollar reaching a rate of NIS 4.22 (mid-April). Since then, the dollar has weakened, to an end-of-year rate of NIS 3.77. Annually, the New Israel Shekel gained strength versus the US Dollar at a rate of 0.7%, and weakened compared to the Euro at a rate of 2.7%. Inflation – 2009 ended with an inflation rate of approximately 3.9% - above Israel's inflation target. This, following a 3.8% increase in the Israeli CPI in 2008, above the maximum inflation limit. In light of the forecast for economic slowdown in early 2009, the actual inflation rate in Israel was higher than expected, due to two main factors: rising housing costs (a contribution of approximately 1.2%) and rising energy prices (a contribution of approximately 1%) and an increase in indirect taxes (VAT, drought tax and fuel – a contribution of approximately 1.2%). It should be noted that the 2009 inflation rate also reflects temporary price increases, mainly in Q3/2009, which were caused by government intervention and contributed to increasing the inflation rate by 1.1%. Net of this increase, the inflation rate for 2009 was 2.8%. As of year's end 2009, inflationary forecasts derived from the capital markets for 2010, are at a rate of 2.5-3%. Interest – In light of the expectation for economic slowdown, the Bank of Israel, similar to other central banks around the world, enacted an expansionary monetary policy from the beginning of 2009. The interest rate in the market was lowered in April 2009 to a record low of 0.5%, and was maintained at this level until September, at which time it was raised to 0.75%. In December 2009 and January 2010, the Bank of Israel raised its interest rate twice by 0.25%, to a level of 1.25%. Rising interest rates in Israel, while the United States and Europe maintained their low interest rates, accelerated the revaluation of the New Israel Shekel, and the Bank of Israel once again intervened in the foreign currency market in January 2010. 1.6.3 Global economic developments Due to the severe global recession, which reached its peak at the end of 2008 and in Q1/2009, the year began with grave concerns regarding the global economy. As such, extensive and coordinated macro-economic intervention measures were instituted by the G20 nations in the monetary, fiscal and financial sectors, with significant increases in the national debts of many nations. With the expansion of the economic stimulus programs, the global economy showed signs of stabilization in Q3/2009, and the majority of developed nations showed renewed growth. In the

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United States, GDP grew by 0.9% in quarterly terms in Q3/2009 as compared to Q2/2009 (3.5% annually), after four consecutive quarters in which the GDP shrunk by a cumulative amount of 3.8%. Growth in the third quarter of the year relied on increased private consumption, re-stocking of inventories and increased production in the industrial sector, as well as growth in non-recurring components such as automobile purchases. GDP in the Euro bloc grew by 0.4% in Q3/2009, as compared to Q2/2009. Government interventions succeeded in restoring public confidence in the banking system, which in turn caused the reduction of credit margins and the renewed issue of non-bank credit facilities on a large scale. Stock markets were characterized by sharp gains which began in March 2009 and also contributed to increasing consumer confidence indices. The improved economic activity was more apparent in developing countries in East Asia, and particularly in China which renewed its growth at a rate of approximately 9% in Q3/2009, compared to the same period last year. During most of 2009, inflation in the United States and Europe was negative, with one of the reasons for this reduced inflation being the reduction in oil prices from their record values in the summer of 2008. In Q4/2009, inflation in the United States and Europe was again positive but still low, with the high unemployment rate and the low utilization of capital in industry moderating inflationary pressures. These data influenced the decisions of the central banks in the United States and Europe to keep interest rates at record low levels throughout 2009. Despite signs of stabilization in the second half of 2009, data continued to surface indicating that the economic crisis was not yet completely over, and that its long-term effects were yet to make themselves fully apparent. Examples of this are the credit collapse in Dubai and ever-increasing difficulties in countries such as Greece, Ireland and Spain, which suffer from growing deficits and high unemployment rates. The credit risk in these countries is on the rise, and is expressed in increased credit margins and demoted ratings by the rating agencies. The economic condition of these countries affects the state of the European Union as a whole in the present, but can also cause potential problems in 2010, especially if they are required to make any budgetary increases. Furthermore, we should point out England, which was the only country among the leading economies which continued to shrink in Q3/2009. Here, too, the causes for England's difficult situation are rooted in the financial sector and continued slowdown of the real estate market. In addition, many corporations including large multi-national corporations continue to face difficulties, due to financing challenges, reduced consumption of their products, and past losses. As regards the emerging markets, it can be said that the majority of these have successfully passed the global economic crisis. These markets suffered, but except for the Eastern European economies, damage was relatively light and short-lived. These economies, and mainly China, Brazil, Russia and India, suffered from reduced demand for their products in developed countries, but still grew due to increased local demand. Accordingly, towards the end of 2009, some of these countries implemented changes in their expansive policies enacted at the start of the year along with increased interest rates, changes in the support given to the banking system, etc. In light of these encouraging figures, leading economic institutions in the world have changed their growth forecast for 2010, which now calls for 3-4% growth in the U.S., 1.5-2% growth in the European bloc, and 5-6% growth in developing countries. However, governments are well aware of the fragility of this forecasted growth. The test for the global economy in 2010 will be proper management of the exit strategy from the massive government stimulus programs in the United States and in Europe. Continued fiscal expansion, the timing of cessation of government support, the implications of discontinuing the diversion of funds and rising interest rates for continued growth, the weakness in the job market and the fragile state of numerous banks still make for a high level of uncertainty. Huge deficits created by these stimulus plans add to the feeling of uncertainty, with credit rating agencies discussing for the first time in 2009 the possibility that the United States and Great Britain will lose their perfect AAA rating. The economic performance of these two countries and the measures that they will enact to reduce their deficits over the next three years may have a crucial effect on the global financial markets. The large deficit in the United States caused the devaluation of the US Dollar and the Pound Sterling across the world in 2009, and the revaluation of the Euro. In concluding 2009, the Euro gained 2.5% versus the US Dollar, and 10.4% versus the Pound Sterling. For further information relating to the general environment and external factors that specifically affected Delek Group's segments of operation, see the description for each of the segments of operation below.

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Part Three – Description of the Corporation's Business by Segment of Operation

Hereunder is a description of the Group’s businesses in each of its segments of operation:

1.7 Refining and Fuels in the USA

1.7.1 General The Group’s refining and fuel operations are handled by the subsidiary Delek US Holdings Inc. ("Delek USA”). Delek USA is a company incorporated in Delaware in 2001 and registered for trade on the New York Stock Exchange since the issue of its shares in 2006. At the date of this report, the Group holds (indirectly) approximately 74.0% of the shares in Delek USA. The activity includes three segments: refining operations conducted as part of Delek Refining, Inc. (“Delek Refining”); marketing conducted under Delek Marketing & Supply, Inc. (“Delek Marketing”), and gas station and convenience store segment conducted under MAPCO Express, Inc. (“MAPCO”). All of the aforementioned companies are wholly owned by Delek USA. The following is a diagram of the structure of the principal holdings of the Group’s US operation:

(All these companies are wholly owned by Delek USA.) In the Group’s 2008 financial statements the activity was described as two distinct segments – the refining and marketing segment, and the gas station and convenience store segment. In the Group’s 2009 financial statements, the activity is described as a single segment, and accordingly, the following description is of a single segment of operation. However for the sake of convenience and to facilitate comparison with the description in the chapter on the description of the corporation’s business in 2008, in this year’s report we will provide a similar description, such that in sections 1.7.2 – 1.7.22 describe the refining and marketing segment, and sections 1.7.23-1.7.43 describe the gas station and convenience store segment. The following is information on high and low closing price (in USD) of Delek USA shares on the NYSE in 2008 and 2009 and until shortly prior to the reporting date:

Period High Low Date Price (in USD) Date Price (in USD) 2008 January 2, 2008 20.47 November 21, 2008 3.51 2009 April 4, 2009 12.41 January 2, 2009 5.27

The closing price (in USD) of Delek USA shares on March 16, 2010 was USD 7.6 1.7.2 Refining and marketing segment - general A. Delek USA holds a refinery ("Refinery”) through three subsidiaries of Delek Refining (“Delek Refining”) and 114-mile crude oil pipeline (“Pipeline”). The Refinery is located in Tyler, Texas, and has a maximum output of about 60,000 barrels per day. Delek Refining purchases most of its raw materials from suppliers in East and West Texas and sells its fuel products to a variety of clients, chiefly local.

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B. On November 20, 2008, an explosion at the Tyler refinery resulted in a fire. Two employees were killed and others were injured. The causes of the incident were investigated concurrently by several entities, including an internal investigation by Delek USA, the Department for Safety and Sanitation in the Workplace, and the US Commission for the Investigation of Chemical Safety Hazards and the US Environmental Protection Agency. In May 2009, the Department for Safety and Sanitation in the Workplace completed its investigation and issued an announcement estimating the fine at USD 0.2 million. Delek USA is appealing this and does not believe that the result will have a material impact on its business. Delek USA cannot with any certainty predict the results of the other investigations, including the possible fines or other enforcement measures. However, it does not believe that the existing proceedings will have a materially negative impact on its operations. The explosion and fire damaged the saturated gas plant and the naphtha hydrotreater. Operations at the Refinery resumed in May 2009, and the Refinery is now working normally. The production rate has increased gradually since operations resumed, and in the third quarter of 2009, reached 54,000 barrels a day. The Refinery carries insurance of USD one billion covering property damage and consequential loss, which according to the current estimate should cover most of the costs for reconstruction of the damaged units and to indemnify Delek USA against loss of profit. Insurance coverage does not include Delek Refining’s deductible (with respect to property damage) of USD 5 million and loss of profit in respect of the 45 days after the insurance event. On December 31, 2009, Delek USA recognized revenues from insurance payments of USD 116 million, of which USD 64.1 million are payments in respect of loss of profit, and USD 51.9 million are payments in respect of property damage. In addition, expenses of USD 11.6 million were recording, which in the end led to net profit of USD 40.3 million with respect to revenues from property damage. The following amounts were recorded in its financial statements, as follows: Q1/2009 Q2/2009 Q3/2009 Q4/2009 Total Loss of profits 21.1 37.0 6.0 -- 64.1 Property damage 9.6 20.6 6.0 15.7 51.9 Total 30.7 57.6 12.0 15.7 116.0

Delek USA expects that additional significant insurance payment will be received upon completion of the lawsuits. The following is a summary of the estimate of losses known to date as a result of the explosion at the Refinery (in USD million): Delek USA Insurance coverage Bodily harm ___ Full coverage Deductible under insurance USD 5 million ___ policy Waiting period of 45 days At least USD 7.5 million for 45 days* ___ from time of insurance event, during which there is no coverage Cost of construction and Estimated at approximately USD 140 million; los of profits during USD 124.4 million were received, including USD 8.4 million in 2008; the coverage period insurance coverage is for a total of USD 1 billion – see Safe Harbor Statements below regarding receipt of additional amounts of insurance. Fines Recommendation for fine of approximately ___ USD 217 thousand; material financial losses are not expected as a result of enforcement measures that may be taken in the future** Lawsuits No lawsuits have been filed in material ___ amounts, and material financial losses are not expected as a result of any lawsuits that may be filed in the future.** The period after insurance The Refinery resumed full operation. ___ coverage (one month after the date on which activity is resumed) * The insurance policy in respect of loss of incoming profit for the period after 45 days from the date of the event and given a loss for insurance purposes of USD 7.5 million. Delek USA believes it has complied with these conditions 45 days after the date of the event.

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** The assumption that material financial losses are not expected as a result of enforcement measures or lawsuits in the future regarding the explosion at the Refinery is forward-looking information, based, inter alia, on Delek USA’s estimates and assumptions regarding the enforcement authority of the various agencies, the amount of damage caused to employees and third parties and the labor laws that mandated compensation to employees by the state. Said information may not materialize, should any of the estimates or assumptions fail to materialize. Estimates regarding the amounts of insurance to be received are forward-looking statements based on the insurance policy and estimates regarding insurance coverage. However, the amount of the insurance claims and the deductible, as aforementioned, may change materially for various reasons, including interpretation of the provisions of the insurance policy, length of the insurance claim, deductible, market conditions which impact of the profit and revenue forecast, actual reconstruction costs and more. Furthermore, the information included in this section regarding the cost of construction work and the amount of insurance coverage is forward-looking information. Said information is based, inter alia, on estimates regarding construction costs and the assumption that insurance will be paid, as required, for the amount of the insurance coverage, and it may not materialize, inter alia, if any of said estimates or assumptions fail to materialize. C. As a supplement to its refining activities, in August 2006 Delek USA acquired a number of assets for its marketing setup and its Refinery from the Pride-L.P group and its associated companies which are based in Abilene, Texas, at a total value of USD 55.1 million, not including inventories. The acquired assets include two terminals for marketing fuel products, one in Abilene and one in San Angelo, Texas; seven 114-mile pipelines for transporting fuel products, and storage containers for fuel products with a total capacity of approximately one million barrels. The acquired assets also include various refining facilities located near the Abilene terminal, some of which Delek Refining has moved to its Refinery in Tyler. Marketing operations refer to the purchasing of fuel products (benzene and diesel oil) and marketing them to end-users by means of a petroleum pipeline and petroleum refining terminals. Fuel products are marketed through three petroleum terminals owned by Delek Marketing, including the two in San Angelo and Abilene, and a third terminal which was acquired along with the Refinery and serves it in Tyler, Texas, and through three additional terminals in Aledo, Odessa, Big Springs and Frost, which are owned by third parties. Marketing activity includes: (1) transportation of fuel products through the Pipeline and from the petroleum refining terminals to trucks owned by Delek Marketing in Abilene and San Angelo, Texas; (2) direct sales of fuel products to third parties through sales terminal to trucks in San Angelo, Abilene, Aledo, Odessa and Big Springs, Texas and through other terminals located along the Magellan pipeline (see below); (3) supply of fuel products in swap transactions at terminals in Abilene, San Angelo and Aledo, Texas; (4) marketing services to Delek USA’s petroleum refinery in Tyler for wholesale sales and sales under sale agreements; (5) the supply of ethanol to MAPCO for blending with gasoline through a new 30,000-barrel storage facility set up by Delek USA at a terminal owned by a third party in Nashville, Tennessee; (6) an arrangement with Delek USA’s Refinery in Tyler, whereby Delek Marketing receives 50% of the wholesale margin over a level agreed by the parties. Delek Refining also acquired the Pride Group’s rights to purchase up to 27,350 barrels a day of fuel products in West Texas, subject to existing supply agreements with Pride. All the fuel products are supplied to Delek Marketing in accordance with two main supply agreements: the first with Northville, for the supply of up to 20,350 barrels a day, and the second with Magellan, for the supply of up to 7,000 barrels a day. For details of these petroleum purchase agreements, see also section 1.7.12 below. Delek Refining purchases the fuel products in accordance with these agreements and transports them via its pipeline network and the Magellan pipeline network to the abovementioned terminals. D. In 2007, Delek US acquired 34.6% of the shares of Lion Oil Company (“Lion Oil”) for approximately US $88.2 million and the issue of 3.7% of its shares. The total investment in Lior Oil as at December 31, 2007 amounted to USD 131.6 million. A private company, Lion Oil operates a 75,000-barrel-per-day oil refinery in El Dorado, Arkansas. It also owns three crude oil pipelines and two refined petroleum marketing terminals in Nashville and Memphis, Tennessee, through which it supplies petroleum to third parties, including Delek USA, which operates 180 gas stations and convenience stores in these areas. For further information on the Lion Oil transaction, see section 1.7.14.

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1.7.3 General information about the refining and marketing segment A. What is refining? Oil refining is a process whereby the various components of crude oil are separated and then converted into products such as benzene, diesel oil, and the like. The refining process has a number of principal stages, including separation processes in which the crude oil is separated into groups of products; fractionalization processes which change the chemical composition of the separated materials to obtain products with a higher added value; refining processes whose purpose is to purify and cleanse the products created during the separation process; and finally – finishing processes whose purpose is to make the products compatible with the standards and specifications demanded by law or pursuant to agreements with specific customers (for example: adding fuel additives). It should be noted that the crude oil market and the refined fuel products market are commodities markets, that is to say, markets where there is standardization of commodities and their trading. B. General environment and the impact of external factors As a refining company, Delek Refining is exposed to trends, events and developments in the fuel market in the areas of its US operation that impact or could impact its activities and the activities of its competitors, including: 1. Fluctuations in global crude oil prices in general and in the area of operations of Delek Refining in particular. The crude oil that Delek Refining purchases is the main cost component of the fuel products produced by the Refinery. The price of crude oil is dictated by oil prices on the international markets. An increase in crude oil prices can lead to an increase in the prices of fuel products, resulting in decreased demand for oil and fuel products. In addition, it should be mentioned that Delek Refining cannot necessarily incorporate a rise in crude oil prices in the price of products manufactured by Delek Refining, and this could be detrimental to Delek Refining's refining margin and on Delek USA's results. In 2008 and 2009, approximately 25.6% and 27.3%, respectively, of the crude oil purchased by Delek Refining was supplied by local suppliers (in East and West Texas). Most of the local crude oil is transported by truck or pipeline owned by Delek USA, explaining the advantage in the cost of its purchase. The rest was purchased from suppliers in West Texas and from international sources. 2. Fluctuations in global fuel prices – Prices of fuels produced by Delek Refining are affected by various factors, including changes in the global and local economy, the level of demand for fuel products inside and outside the United States, the global political situation in general and that of the principal oil production regions in particular, the production volume of crude oil and of oil distillates in the United States and globally, development and marketing of petroleum substitutes, disruptions in supply lines, local factors including market conditions, climate conditions, output capacity levels of competing refineries, and US government regulations. 3. Legislative limitations, regulatory developments and special constraints applicable to the refining activity – Delek Refining is subject to the laws, regulations and standards that are determined by the competent authorities in the segment at the federal, state and local levels, primarily in terms of environmental protection and standardization. For further information, see sections 1.7.18 and 1.7.19. 4. Economic slowdown – Most Delek Refining products are intended for the transportation industry (automotive and aircraft). An economic slowdown in the US could reduce the demand for flights and traffic volume on the roads, thereby reducing both total demand for oil products and the Refinery’s refining margin (as defined in section 1.7.3). 5. Refining capacity – The strict environmental protection regulations applicable to fuel products such as benzene and diesel for transportation, could limit the maximum potential and expansion of the existing facilities and harm the refining capacity of Delek Refining. Such standards could compel Delek Refining to upgrade its existing facilities and to add new facilities in order to adapt its product basket to demand. It should be noted that in recent years there has been a significant growth in the demand for oil distillates. The growth in demand was met by increasing exploitation of global refining capacity and adapting it to the level of demand and to the increasingly strict standards governing the production of fuel products. Historically, increases in demand have led to cycles of increased profitability, which in turn have led to investments that have made it

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possible to increase supply. This then led to periods of surplus production capacity and a decline in the industry’s profitability. C. Changes in the volume and profitability of refining and marketing activity Oil products such as those produced by Delek Refining are traded on international markets, making the prices of its products prone to extreme daily fluctuations. Delek Refining therefore enters into agreements with its customers on the basis of a price formula that reflects the changes in market prices. Results in the refining industry are influenced and measured by the difference between the prices of petroleum distillates and the prices of crude oil, which is known as the refining margin. The refining margin is the difference between the cost of the crude oil (including costs of transportation, insurance, unloading, storage, and transporting to the Refinery), and the return on the sale of the refined product mix. The relevant refining margin for Delek Refining is known as the US Gulf Coast 5-3-2 Spread ("5-3-2 Spread"), which measures the difference between the price for 3/5 barrel of US Gulf Pipeline 87 Octane Conventional Gasoline and 2/5 barrel of US Gulf Coast Pipeline No. 2 Heating Oil, and the price of 5/5 barrel of light crude oil as quoted on the New York Mercantile Exchange for supply in the next month. The fluctuations in the energy market continued in 2009. According to data published by Bloomberg, the average 5-3-2 Spread in the US Gulf Coast in 2009 was $5.97 a barrel, and in 2008 averaged $11.13 a barrel. In 2009 the actual refining spread of Delek Refining, plus the marketing fee between the companies, was $7.07 a barrel. In 2008 it was $10.05 a barrel. The average price of crude oil in the company’s period of operations in 2008 and 2009 was $106.95 and $71.22 a barrel, respectively. The refining margin is influenced by a number of variables: 1. Crude oil prices. 2. Changes in local and international economic conditions. 3. Volume of local and international demand for fuel products. 4. Global refining capacity. 5. Speculative supply and demand that impact on prices on the commodities market. 6. Changes in the global geo-political situation, particularly in the oil-producing regions such as the Middle East, West Africa, the CIS states (the former Soviet Union) and South America. 7. Local and foreign production levels of crude oil and fuel products and the level of crude oil, other raw materials and fuel products imported into the United States. 8. Utilization levels of US refineries. 9. Development and marketing of alternative fuel products. 10. Stoppages or disruptions in supplies to the Refinery. 11. Local factors, such as market conditions, climate changes, and activity level of refineries and pipelines in the market. 12. Government legislation. 13. The Refinery’s product basket is influenced by the types of crude oil it purchases and by the Refinery’s facilities which influence the refining technology. The Refinery produces mainly "white" products: in 2009 and 2008 some 95% and 91.8%, respectively, of the Refinery’s products were white products (i.e. products that are not fuel oil, such as gasoline, diesel oil or jet fuel) and the remainder are heavy products and others. Since only the last factor can be influenced by the Refinery, and it is not central to determining the refining margin, profitability in refining activity depends more on changes in the global market than on Delek Refining. The basket of oil products is refined from crude oil, and the Refinery has a marginal ability to influence this basket through the quality of the processed raw material and the manufacturing

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processes. In the absence of the ability to have a significant influence on the product basket, taking into account the level of demand and product prices, there is no significance from the Refinery’s point of view in relating to the gross profit of a single product, and refineries are judged by the refining margin obtained from sales of the product basket. It should also be noted on this matter that the ability of a refinery to reduce the amount of refined heavy products by increasing the number of "white" products is measured by the Nelson Complexity Index ("Nelson Index") – the higher the Index, the greater the refinery’s ability to produce more white products. In addition, the compatibility of the refinery’s production should be examined against demand in its area of activity. The Refinery’s present rating is 9.5 on the Nelson Index. According to data published by the Oil & Gas Journal, the Nelson Index range for refineries in the Gulf of Mexico region ranges between 1 and 16.9. D. Structure of competition in the refining and marketing activity See section 1.7.7 below. E. Critical success factors in the refining and marketing activity Delek Refining estimates that the key success factors of its Refinery are the following: 1. Level of refining margins 2. Selecting the optimal mix of types of crude oil and locating supply sources 3. Availability of capital and the operational availability of refining facilities 4. Refinery location – Delek Refining’s refinery is the only one in a 100-mile radius offering a range of petroleum distillates 5. Optimization of supply and production chain 6. Ability to comply with product standards and changing regulatory requirements and to adapt the Refinery to these standards 7. Location of the petroleum terminals 8. Possibility of using the existing pipeline infrastructure in the areas of operation for transporting fuel products, and the ability to expand the use of this pipeline infrastructure. F. Changes in the supplier setup and raw materials in the refining and marketing activity Delek Refining purchases crude oil from a large number of suppliers in East Texas, West Texas and from imports, and is not dependent on any single supplier. Delek Marketing purchases fuel products from one main supplier. For details, see section 1.7.12. G. Technological alternatives and changes influencing the refining and marketing activity In light of the changes in crude oil prices in recent years and due to issues regarding environmental protection and the array of energy sources, governments throughout the world are examining long-term plans for a partial transition to alternative energy and various companies throughout the world are trying to develop energy alternatives to oil. At the date of this report and until such time as efficient and inexpensive energy solutions are found, Delek Refining does not anticipate a significant drop in demand in the areas in which it operates due to said alternatives, in the foreseeable future. The information in this section regarding Delek Refining’s belief that no significant decline in demand resulting from energy alternatives to crude oil is to be expected in segment of operation in the short term is forward-looking information. This information is based on general information about the hitherto relatively slow rate of development in the transition to alternative energy, as well as on the continuing demand for oil. The information may not materialize if, inter alia, there are significant developments in the finding of alternative energy solutions, if greater resources are invested in finding such solutions, or governments decide to enforce or promote incentives for the transition to energy alternatives. H. Entry and exit barriers The main barriers to entry into refining and marketing are the capital required in order to set up new refineries and pipelines for oil and fuel products, and the limited capacity of the existing pipeline infrastructures which are in many instances operating at full capacity, making it

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difficult for new competitors to enter the area of activity. There are also strict licensing and environmental protection requirements. The most significant barrier to exiting the sector is the value and designation of the facilities, and the environmental consequences for the land on which they have been constructed, which can limit other possible uses. 1.7.4 Products and services A. The products marketed by Delek Refining include the following fuel products: − Gasoline – In 2009 and 2008, gasoline accounted for approximately 54.8% and 54.4%, respectively, of all the products produced by the Refinery. The Refinery produces three different types of gasoline (premium – 93 octane, regular, and medium) as well as aircraft fuel. As of January 1, 2008, Delek Refining started selling E-10 products, which contain 90% regular gasoline and 10% ethanol. − Diesel and jet fuel – In 2009 and 2008, diesel and jet fuel accounted for approximately 36.7% and 37.4%, respectively, of all products produced by the Refinery. Delek Refining produces diesel and jet fuel in accordance with the military standard (JP-8), fuel for civilian jet planes, low sulfur diesel, and since September 2006, ultra low sulfur diesel). − Petrochemical products – The Refinery produces small quantities of propane, propylene and butane. − Other products – The Refinery produces small quantities of other products, among them coke, slurry oil, sulfur and other mixtures. B. The products marketed by Delek Marketing include the following oil products: − Gasoline – In 2009 and 2008 the various types of gasoline accounted for some 50.6% and 48.1%, respectively, of all the products marketed by Delek Marketing. Delek Marketing markets two different types of gasoline (premium – 93 octane, and 87 octane). − Diesel - In 2009 and 2008, the various types of diesel accounted for some 48.9% and 51.4%, respectively, of all the products marketed by Delek Marketing. Since September 2006 Delek Marketing has been marketing ultra low sulfur diesel. Breakdown of revenues from products and services C. The following table shows the amounts and percentages of revenues from sales of products or services by Delek Refining and Delek Marketing, whose total revenues represent 10 percent or more of the Group’s revenues:

Total sales in % of Delek USA % of Delek Group’s Product NIS million revenues revenues Gasoline 2,755 26.5% ~6.3% 2009 Diesel 1,991 19.1% ~4.6% Gasoline 5,054 ~29.5% ~10.9% 2008 Diesel 4,501 ~26.3% ~9.7%

In 2009 and 2008, marketing revenues amounted to approximately $374.4 million and $745.5 million, respectively. The sharp drop in revenues can be primarily attributed to the growth in refined products in central Texas – increase in inventories due to the decline in demand in foreign markets below historical levels. D. In 2009 and 2008, gross profit in refining activity amounted to approximately $72.5 million and $170.5 million, respectively. Profitability in refining in these areas cannot be compared, as the Refinery was closed in the first five months of 2009, and the profit grossed up in income from insurance in 2009 amounted to $116 million. In 2009 and 2008, the gross profit from marketing was approximately $24.9 million and $24.3 million, respectively, and the profitability rates for marketing were 6.7% and 3.3%, respectively. 1.7.5 Customers Delek Refining markets its fuel products to the large fuel companies, independent refineries, fuel distributors, gas station operators, utility and transportation companies, independent retailers, and to the US government under a tender that is due to end in April 2010. Sales to the US government in 2009 under said contract constituted 5.6% of total sales. Agreements with the large fuel

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companies are usually made on the basis of an annual purchasing agreement, where the sale price of the fuel products is a function of the prices of fuel products traded in the Gulf of Mexico region. Sales to other customers are usually on an occasional basis and at a fuel product price set by Delek Refining ex-works. Delek Refining’s fuel products are sold to about 110 customers. In 2009 and 2008, sales to the ten largest customers of Delek Refining, among them large energy companies, accounted for about 60.2% and 59.4% of Delek Refining’s net sales, respectively. In 2009 and 2008, no single customer in the refining operation contributed more than 10% of Delek USA’s revenues, but sales to one customer, one of the largest energy companies, accounted for about 13.9% and 13.4%, respectively, of revenues from the refining activity. Delek Marketing sells its products to customers in West Texas, among them large oil companies such as Exxon Mobile, independent marketing refineries such as Murphy Oil, petroleum agents, companies in the service and transportation sectors and others. Delek Marketing’s products are sold to some 120 customers. Neither Delek Refining nor Delek Marketing is dependent on any single customer. 1.7.6 Marketing and distribution Most of Delek Refining’s sales are done directly from the Refinery, through the Refinery's supply terminal which has nine lanes, enabling the addition of a wide variety of petroleum additives, including special additives which are sold to the main oil companies that purchase fuel from the Refinery and E- 10 products. The Refinery sells coke mainly by means of railway cars and, when needed for large or special orders, by means of tankers. The Refinery is connected to a pipeline for the sale of propane. Delek Refining distributes its other products through an oil pipeline (owned by a third party). As part of its activities, Delek Marketing sells fuel products through three terminals it owns in West Texas (Abilene, Tyler and San Angelo). The Abilene and San Angelo terminals are connected to each other as well as to a nearby air force base and to a system of pipelines owned by the Magellan Company, by means of 7 different pipelines owned by Delek Marketing. In addition, Delek Marketing sells products through four terminals owned by a third party. Delek Marketing is dependent on the flow infrastructure of the Magellan in Texas since all its products are marketed directly and indirectly (by swap transactions in unsubstantial volumes) via this pipeline system. Delek Marketing also holds a 65-mile long storage and transport system for oil in East Texas, which is responsible for moving crude oil to the Refinery in Tyler, and pumping stations and terminals operated by Delek Marketing. 1.7.7 Competition Delek Refining operates, as stated, in the US state of Texas and markets its products primarily to local customers in East Texas. Delek Marketing concentrates its operation mainly in West Texas. The fuel refining and marketing segment is highly competitive, and includes national and international fuel companies operating in various oil-related businesses, including oil exploration, production, refining and marketing of fuel products and the operation of convenience stores. Delek Refining’s main competitors include the refineries in the Texas Gulf region, operators of fuel supply terminals and Calumet Lubricants in Shreveport, Louisiana. The main competitors of Delek Marketing are owners of other independent terminals and other fuel companies operating in its segment of operation in West Texas. The competition is expressed mainly in location, price and the range of products and services sold. The costs of transporting the products from the fuel terminals to the end-user limit the geographic size of the market of fuel purchasers for whom it is economical to purchase from the fuel terminals of Delek Marketing. The two main markets of Delek Marketing are in West Texas, in the Abilene and San Angelo areas. In the Abilene area there is direct competition from another refinery which markets fuel products through another fuel terminal. In the San Angelo area there is no competition for the fuel terminal of Delek Refining, the nearest competitor being 90 miles from the terminal. The competition between Delek Refining and Delek Marketing and their competitors is affected by the price paid for raw materials, production margins, refinery efficiency, and the mix of products produced by the refinery, as well as transportation and distribution costs. Some of Delek Refining’s competitors operate larger and more complex refineries in various geographic regions and their production costs per barrel are therefore possibly lower. Furthermore, some of Delek Refining and Delek Marketing competitors are large, international corporations, and some are also engaged in oil exploration, allowing them to refine crude oil they own and enjoy the economy of scale. Delek

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Refining and Delek Marketing also compete with other energy industries (wind, sun and water) that provide alternative energies to fuel. Delek Refining and Delek Marketing combined have a negligible share in the sale of fuels in Texas. Delek Refining copes with competition in its segment of operation by means of location (geographical proximity to some of the fuel purchasers that facilities a reduction in the cost of shipping and competitive prices), selection of product mix to suit demand, and streamlining of the Refinery. Delek Marketing copes with competition in its segment of operation by means of location (geographical proximity to some of the fuel purchasers), cost- cutting, and selection of product mix to suit demand. As stated above, the crude oil market and refined fuel product market are commodities markets, i.e. markets where there is standardization of commodities and constant trading, and consequently the main factors influencing the competitiveness of the Refinery and of the fuel terminals include: A. The location and accessibility of the Refinery (relative distance from the Refinery or other terminals) for local customers give it an advantage vis-à-vis customers located in its area of operation. B. The location and accessibility of fuel terminals for local customers C. The output of the Refinery. D. Constant monitoring and improvement of product quality so that it complies with the standards norms and specifications required by law and by customer demand. E. Selection the optimal mix of types of crude oil and identifying sources of supply. 1.7.8 Seasonality The demand for gasoline products is generally higher in the summer than in the winter months because of a seasonal rise in vehicular traffic in summer, although the demand for all types of diesel is higher in winter. In addition, historically, the refining margin in the first and fourth quarters of the year is usually lower than in the second and third quarters. As a result, the operating results of Delek Refining and Delek Marketing are usually lower in the first and fourth quarters. Below is a table showing the average 5:3:2 Spread in the Gulf of Mexico region, in dollars, by quarter:

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 2009 9.14 7.78 6.38 4.50 2008 8.84 13.24 15.08 3.92

1.7.9 Production capacity A. The Refinery’s maximum production capacity when operating is approximately 60,000 barrels per day, depending on the raw material that is processed and its sulfur content. In 2009, Delek Refining refined about 12.3 million barrels of oil and other raw materials, averaging approximately 53,802 barrels a day over 228 days. In 2008, Delek Refining refined some 18.4 million barrels of oil and other raw materials, averaging approximately 56,922 barrels a day over 324 days. Below is a table listing the products produced by the Refinery in 2008 – 2009 (in millions of barrels) and the average daily output of barrels in each year.*

2008 2009 Daily Daily Quantity Output** Quantity* Output** Gasoline 9.8 30,346 6.4 28,707 Types of diesel 6.8 20,857 4.3 19,206 Other 1.4 4,570 1 4,414 Total 18.0 55,773 11.7 52,327

* The quantity produced is lower by an average of some 2.5% than the refined quantity. ** The information is calculated based on the 324 and 224 days during which the Refinery was operational in 2008 and 2009, respectively.

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B. In 2008 and 2009 Delek Marketing sold some 4.9 million barrels and about 6.0 million barrels of oil distillates respectively, which is an average of 13,378 barrels a day and 16,557 barrels a day, respectively, according to the following breakdown:

2008 2009 Quantity Quantity Quantity Daily output Gasoline ~2.9 7,980 ~2.5 6,777 Types of diesel and other* ~3.1 8,577 ~2.4 6,601 Total ~6 16,557 ~4.9 13,378 * Includes an average of 60 barrels a day of other products in 2008 and an average of 49 barrels a day of other products in 2009. It should be clarified that Delek Marketing does not sell fuels produced by Delek Refining, except in cases when it can market the fuels at terminals at which it does not regularly operate. C. Investments in the refining segment can be divided into three main types: improvements to the Refinery (discretionary), as outlined in this section below, ongoing maintenance, as outlined in section 1.7.10 below, and investments for environmental protection, as outlined in section 1.7.187 below. Below is a breakdown of investments for 2008 and 2009 (in USD millions) and investments forecast for 2010 (in USD millions). In 2009, these investments included the reconstruction of the units damaged in the explosion at the Refinery:

2008 2009 Forecast for 2009 Improvements 37.5 84.2 3.2

The explosion at the Refinery in the last quarter of 2008 caused a shut-down, which continued through May 18, 2009. While the Refinery was closed, several projects were brought forward, in which various areas of the refining facility were upgraded, and which are expected to increase the Refinery’s capability to process sourer and less expensive oil. These projects are expected to reduce the cost of oil processed by Delek USA. Some of these projects were completed in the first half of 2009 and the remaining projects are expected to be completed by 2013. For details of anticipated environmental investments, see section 1.7.18. 1.7.10 Property, plant and equipment, and facilities Delek Refining property – The facilities of Delek Refining in Tyler, Texas are located on land owned by Delek Refining on a contiguous area of 2.643 km2, of which 440.6 km2 are built up. Delek Refining’s facilities include refinery units, fractionalization processors, additional production units (coker), a sulfur treatment plant, infrastructure facilities (buildings, storage tanks, pipes, etc.) and service facilities (including tanker trucks). Delek Refining also owns a 104-kilometer pipeline for the transportation of crude oil, as well as four terminals for crude oil intake and pumping stations. Delek Refining performs regular maintenance work on the Refinery on an average of once every three or five years and in two stages. The division into two stages was designed to enable the Refinery to operate on a partial basis and avoid shutting down for over a month. In the first half of 2009, Delek Refining completed multi-year maintenance work, turnaround, at a total cost of $52.5 million. Each stage requires about three weeks, during which the refinery works at reduced capacity. Below is a breakdown of Delek Refining’s investments in regular maintenance (including work in accordance with a multi-annual turnaround plan which includes a regular investment in the refinery’s facilities and equipment) in 2008 and 2009 and a forecast for 2010 (in USD millions):

2008 2009 2010 7.6 52.5 4.7

Delek Marketing property – In addition, as stated in section 1.7.2C above, at the end of July 2006 Delek USA acquired a number of assets for the marketing setup and the Refinery from companies in the Pride-L.P Group and its affiliated companies in Abilene, Texas. The assets acquired include two terminals for marketing fuel products located in Abilene and San Angelo Texas, seven 114-mile pipelines for transporting fuel products, and storage tanks for fuel

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products with a gross capacity of approximately one million barrels. Also included are various refining facilities located near the Abilene terminal, such as an atmospheric facility and a vacuum facility for the refining of crude oil and additional equipment. In addition, Delek Refining has a 10- year option to acquire the land on which the Abilene refining facilities are located, for a consideration which is not material. Furthermore, in 2009 Delek Marketing purchased a 65-mile oil pipeline along with oil storage facilities near the Refinery from Delek Refining for $29.7 million. 1.7.11 Human capital A. Below is a breakdown of the employee headcount for the refining and marketing activity for 2008 and 2009:

31.12.2008 31.12.2009 Refining and Refining and Department Pipeline marketing Pipeline marketing Management 1 13 1 13 Production - 106 - 134 Maintenance 8 39 8 43 Finance and purchase of fuels - 18 - 20 Support - 24 - 26 Environment - 10 - 12 Marketing and distribution - 44 - 47 Engineering - 9 - 9 Total 9 263 9 304

B. Investments in training – Delek Refining and Delek Marketing conduct safety training for all employees. Employees participate in seminars and professional training. Delek Refining and Marketing invest resources in the professional training of operation and maintenance personnel in their areas of occupation, while safety training is provided to all employees pursuant to relevant laws. C. Benefits and nature of employment contracts – Employees of Delek Refining and Delek Marketing do not have individual contracts. At December 31, 2009, approximately 194 of Delek Refining employees are members of a workers’ union and are governed by a collective bargaining agreement that is valid through January 31, 2012. D. The management of Delek Refining and Delek Marketing and a number of their senior officers are employees of Delek USA. For details, see section 1.7.33. E. In addition, Delek USA has an incentive program for employees in which some of the employees of Delek Refining and Delek Marketing are entitled to a grant of options under a plan approved by the Delek USA Board of Directors. For details see section 1.7.10F. 1.7.12 Raw materials and suppliers A. The main raw material used by Delek Refining in its segment of operation is crude oil. The market for crude oil and products is a commodities market which is sophisticated and has a high level of negotiability in both the physical arena and in futures trading, executed on stock exchanges or with large international entities. Delek Refining purchases its crude oil from various suppliers in the US. Below is a chart showing the breakdown of crude oil purchased by Delek Refining in 2008 and 2009:

% of crude oil purchased out of total crude oil purchased Source 2009 2008 Crude oil from East Texas 27.3% 25.6% Crude oil from West Texas 66.2% 68.0% Other 6.5% 6.4% Total 100% 100%

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B. Over 90% of the oil processed by Delek Refining originates in Texas, with about 25% from East Texas in close proximity to the Refinery and the rest from West Texas. The location of sources of oil and the availability of the oil enable Delek Refining to benefit from low transportation costs. Delek Refining usually enters into agreements with some 10 – 15 suppliers, although there is nothing to prevent it from entering into agreements with other suppliers. In 2009 and 2008, the largest supplier supplied Delek Refining with some 11,000 and 9,000 barrels a day, respectively (accounting for about 23% and 20% of its acquisitions of crude oil in 2009 and 2008, respectively), and its agreements with that supplier are on a monthly basis. It acquires the balance of its crude oil from suppliers on a spot basis, and not on the basis of long-term transactions. Delek Refining is not dependent on one specific supplier since it has access to the crude oil markets in West Texas and in the Gulf of Mexico region. Delek Marketing purchases oil in East and West Texas based on the economic profitability of processing the different kinds of oil. In 2009, Delek Marketing purchased fuel products from two suppliers under two, different long-term agreements. The first was with Northville Product Services L.P. ("Northville"), which according to the agreement would supply up to 27,350 barrels a day to the terminals at Abilene and San Angelo on preferred terms. Under the agreement, Delek Marketing can purchase up to 20,350 barrels a day for the supply of petroleum to terminals owned by Delek Marketing at a price that is a function of the price in the Gulf of Mexico and of the price in the Abilene region. This agreement is valid through December 31, 2017. The second agreement is with Magellan, and enables Delek Marketing to purchase up to 7,000 additional barrels of fuel products a day, to be supplied to terminals owned by Magellan, and is valid through December 14, 2014. The second agreement also determines Delek Marketing's right to use the pipeline infrastructure for transporting Magellan petroleum at a tariff set in the agreement, which is a function of the price of the basic product in the Gulf of Mexico. Delek USA is dependent on Magellan which owns, as aforementioned, the pipeline infrastructure and terminals used by Delek Marketing for its operations, as described in Section 1.7.22Q (Risk factors in the refining and marketing activity). 1.7.13 Working capital A. Inventory maintenance policy for crude oil and finished products It is the policy of Delek Refining to maintain an inventory of crude oil (the raw material) and fuel products (the finished product) at a level that ensures continuous supply of oil products and fulfillment of its obligations to customers. The main factors influencing the size of the inventory are as follows: − Need for a minimal inventory required to fill the lower part of the tanks and pipelines. − Need to maintain a large number of types of crude oil for the refining of various mixtures. − Condition of the crude oil market and the oil products market and the estimate of Delek Refining regarding the level of expected demand for its products and its production capability. Delek Refining and Marketing maintain in the Refinery, in different terminals and in third-party facilities, inventories of crude oil, fuel mixtures and distillates whose value fluctuates according to the state of the global economy, the level of inventory in the local and global markets, and seasonal conditions. Below is a breakdown of the total inventories in the refining and marketing activity, including the average price at the end of 2008 and 2009:

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December 31, 2008 December 31, 2009 Quantity Av. price Total Quantity Av. price Total (in bbl M) per bbl ($) value ($M) (in bbl M) per bbl ($) value ($M) Delek Refining1 0.9 46.9 41.5 1.1 64.3 70.8 Delek Marketing2 0.08 57.7 4.9 0.044 88.6 3.9 Total 0.98 47.3 46.4 1.144 65.2 74.7

B. Credit policy 1. Customer credit: Delek Refining and Delek Marketing grant their customers 3 – 15 days' credit (10 days on average). The average amount of credit to customers at December 31, 2008 and December 31, 2009 was approximately $21.0 million and $59 million, respectively. The increase is the result of the shutdown of the Refinery. Average number of credit days to customers of Delek Refining, less the impact of the fire in 2008 and 2009, was 12 and 13 days in average. Credit to Delek Marketing customers in 2009 averaged 12 days. 2. Supplier credit − Delek Refining – receives a total of 35 days of supplier credit (EOM + 20) for the purchase of crude oil, usually accompanied by a bank letter of credit. On December 31, 2008 and December 31, 2009, total supplier credit was approximately $5 million and US $104 million, respectively. In 2008 and 2009, supplier credit for Delek Refining averaged 35 and 32 days, respectively. − Delek Marketing – receives 10-12 days' supplier credit for purchases of petroleum distillates. At December 31, 2008 and December 31, 2009, supplier credit averaged approximately $6.5 million and $10.9 million, respectively. In both 2008 and 2009, supplier credit for Delek Marketing averaged 10 and 12 days, respectively. 1.7.14 Investments A. As stated above in section 1.7.2C, on September 25, 2007 Delek USA closed a two-stage transaction with a number of shareholders of Lion Oil for the acquisition of their minority interest in said company, whereby Delek USA acquired 34.6% of Lion Oil shares through a total investment of approximately $88.2 million in cash. In addition, as part of the consideration, Delek USA issued 1,916,667 of its ordinary shares, with a value of $51.2 million. At December 31, 2008 and December 31, 2009, the total investment of Delek USA in the acquisition of Lion Oil shares amounted to $131.6 million, respectively. B. A privately held company incorporated in the state of Arkansas, Lion Oil operates a 75,000- barrel-per-day oil refinery in El Dorado, Arkansas. It also owns three crude oil pipelines, systems for the collection of crude oil and two terminals for the marketing of fuels in Nashville and Memphis, Tennessee, through which Lion Oil supplies petroleum to third parties, including to some of the 180 convenience stores Delek USA operates in these areas. Delek USA purchases products from Lion Oil at market price. In 2008, its purchases were estimated at $11.7 million, and in 2009, at $9.8 million. In addition, Delek Refining’s refinery sold intermediate products to Lion Oil for approximately $1.9 million in 2008 and $2.5 million in 2009. Lion Oil's refinery is located close to the TEPCO pipeline that transports light products. The pipeline passes through El Dorado, Arkansas, and provides local access to products produced in the US Gulf Coast area. As a result, most of the products produced by the Lion Oil refinery are transported to other geographic markets. Asphalt and fuel oil are marketed in southern Arkansas, northern Louisiana and eastern Texas. The light products, such as gasoline products and low sulfur diesel, are marketed in central Arkansas, western Tennessee, and southern Missouri. A significant rise or fluctuations in crude oil prices might have a detrimental effect on profitability, especially with respect to products such as asphalt, propane and other products produced by Lion Oil, since their prices are not correlated with the fluctuations in crude oil prices.

1 Delek Refining’s inventory contains both crude oil and fuel products for sale. 2 Delek Marketing’s inventory contains only fuel products for sale.

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C. Lion Oil’s refinery can produce a range of gasoline products, distillates, propane, solvents, high sulfur diesel, low sulfur diesel, asphalt products and protective coatings, and liquefied petroleum gas. The distillation capacity of Lion Oil's refinery is slightly higher than that of Delek USA's Tyler refinery. Lion Oil's refinery differs from Delek USA's refinery in two additional aspects: first, Lion Oil's refinery is designed to process medium sour crude oil, as opposed to Delek USA's refinery, which is designed to process mainly, light, non-sour crude oil; second, Lion Oil's refinery can produce asphalt and fuel oil, whereas Delek USA's refinery produces only minimal quantities of fuel oil. D. In October 2008, Delek USA began stating its investment in Lion Oil by the cost accounting method rather than by the equity method that was used until the acquisition. For additional information relating to the accounting treatment, see Note 13 to the financial statements. Subsequent to the change in the method, Delek USA stopped recorded the equity profit/loss in respect of its investment in Lion Oil and stated its investment according to its fair value on the date of the statements. According to the present accounting method, Delek USA's investment in Lion Oil is $131.6 million. 1.7.15 Financing Delek Refining and Delek Marketing finance their operations through bank credit, non-bank credit, and independent means. A. Credit facility 1. Delek Refining had a credit facility of about $300 million raised through a US bank (SunTrust ABL) and secured by assets, which it uses for daily operations and oil purchases. The credit facility bears predetermined interest brackets and allows Delek Refining to choose between a fixed "base interest" based on LIBOR plus a margin, and interest based on the Eurodollar. Following the explosion at the Refinery, the credit facility was suspended and amendments were made to the agreement to prevent its breach. In the third quarter of 2009 all of the conditions were met for renewed access to the credit facility. At the end of 2009, Delek Refining did not use this credit facility except for letter of credit expenses totaling some $92 million at December 31, 2009. It should be clarified that Delek Refining is under no obligation to use this credit facility, and use of it is conditioned upon compliance with financial covenants (see below). The credit facility was valid through April 28, 2010. In February 2010, Delek Refining entered into a new credit facility agreement for $300 million with a consortium of lenders headed by Wells Fargo Capital Finance (“New Credit Facility”). At the same time, a debt under the aforementioned credit facility was paid and cancelled. The New Credit Facility is valid through February 23, 2014, and its main purpose is to support the refinery’s working capital needs. It bears interest according to fixed, predefined brackets and allows Delek Refining to choose between interest based on prime plus a margin or Libor-based interest plus a margin, with the initial margin determined at LIBOR+4% or Prime+2.5%. The ability to borrow against the New Credit Facility is determined according to a calculation included in the credit agreement. As of the date of execution of the credit agreement, this ability was set at $177 million, of which the company used $136 million, mainly for expenses related to issuing letters of credit for the purchase of crude oil. 2. As at the report date, Delek Marketing has a credit facility raised in December 2006 through an American bank (Fifth Third) and secured by assets, which it uses for current operations and for purchases of fuel products. The terms have been amended several times since. To date, the credit facility is for up to $75 million (of which up to $35 million for letters of credit), valid through December 19, 2012. The credit facility bears predetermined interest brackets and allows Delek Marketing to choose between a LIBOR-based interest and a rate based on the prime interest rate. The current interest in 2009 was LIBOR + 4%. At December 31, 2009, Delek Marketing had used about $42.5 million (of the credit facility) and in addition issued a letters of credit for a total of $10 million. The loans are secured by all of Delek Marketing’s assets. Use of the facility is conditioned upon compliance with financial covenants (see below). As of December 31, 2009, and the date of the report, Delek USA has a credit facility it uses for its ongoing operations, which was raised through a US bank (Reliant Bank) in the amount of up to $12 million, and valid through March 28, 2011. This facility bears interest of LIBOR + 3.25%. At December 31, 2009, Delek USA had not used this credit

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facility. Use of the credit facility is conditioned upon compliance with financial covenants (see below). B. Variable Interest Credit Following is a breakdown of the variable interest credit received by Delek Refining, Delek Marketing and Delek USA, in accordance with current loan agreements at December 31, 2009.

Interest range Average annual Interest rate Loan Change 1/1/2009 – interest rate in at amount Loan type mechanism 31/12/2009 2009 31/12/2009 ($M) Delek Refining – long-term L+3.0%(4) 4.75% 4.75% - 0 4.5% Delek USA – short term L+3.5%(1) 2.4%-4.5% 3.5% 4.5% 30.0 Delek USA – L+2.825%(1 long term ) 3.2%-4.5% 3.97% 20.0

Delek Finance – long term L+3.50% (2) 5.0% 5.0% 5.0% 30.0 Delek Finance – long term L+4.5%(2) 5.0%-5.5% 5.17 5.0% 15.0 Delek Marketing – short term L+4.0%(3) 1.86%-6.25% 3.61% 4.35% 42.5

(1) Minimum interest of 4.5% as of June 23, 2009. (2) Minimum interest of 5.0%. (3) As of December 31, 2009, the interest in respect of this loan was P+3.0%. (4) As of December 31, 2009, the interest in respect of this loan was P+1.5%. This credit facility was replaced in February 2010, as set out above. C. Loans Delek Finance received two loans from an Israeli bank, the terms of which were amended in 2009 and at this time are as follows: 1. A loan of $30 million due on December 31, 2011. Under the terms of the loan, the principal payments of $1.25 million will be paid quarterly as of the end of the first quarter of 2010. The balance of the principal will be paid at the end of the term. The interest rate of LIBOR + 3.5% or minimum interest of 5%. 2. A loan of $20 million due on May 11, 2011. Under the terms of the loan, $0.75 million of the principal will be paid in quarterly payments as of the end of the first quarter of 2010, and the balance of the principal will be paid in a single payment at the end of the term. Interest is LIBOR + 4.5%, or minimum interest of 5%. Delek USA was given two loans from an Israeli bank, the terms of which were amended in 2009, and at this time are as follows: 1. A loan of $30 million to be repaid on January 3, 2011. Under the terms of the loan, $2 million of the principal will be paid each quarter as of the second quarter of 2010, and the balance of the principal will be paid at the end of the term. Interest is LIBOR + 3.5% or minimum interest of 4.5%. 2. A loan of $20 million to be repaid on May 11, 2011. Under the terms of the loan, $1 million of the principal will be paid quarterly as of the beginning of the second quarter of 2010, and the balance in a single payment at the end of the term. Interest is LIBOR + 2.825% or minimum interest of 4.5%. Four of the loans from Israel banks require compliance with financial covenants (see below), and a charge was placed on Delek USA’s shares in Lion Oil to secure the loans.

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At the end of September 2009, Delek USA received a loan of $65 million from Delek Petroleum for a 12-month term. The loan bears fixed annual interest of 8.5%, paid quarterly and on the date of repayment of the loan, subject to the fact that at any time after December 31, 2009, Delek Petroleum will be entitled to make a one-time change in the interest rate and currency of the loan principal, provided that the new interest is not higher than the market interest rate for similar loans. The loan principal is due for repayment on October 10, 2010, with an option for early repayment without penalty. The loan is without securities. Delek Petroleum received a loan under similar terms from Delek Group. D. Raising additional funds Delek Refining estimates that its current cash flow, including loans and credit agreements, will be sufficient for the next 12 months, subject to receipt of insurance payments in respect of the fire at the Refinery and the reactivation of the credit facilities, including finding sources of financing for the current repayments of current loans. Additional capital might be required to realize acquisitions, expenses or general financing. If needed, Delek Refining will raise this additional capital from various financing sources. However is not certain that Delek Refining will be able to raise additional financing, or the terms at which it will be able to raise such. As described under the risk factors, the current crisis had a material and negative impact on the banks and restricted many companies’ access to financing. Delek USA and its subsidiaries in the fields of refining and marketing have loans in material amounts, due in 2010 and 2011 (approximately $81 million in 2010 and $79 million in 2011), or even earlier in case of non- compliance with financial covenants. In light of the crisis, it may be difficult to extend the credit facility and loans or attain alternative financing to them under terms that are good for Delek Refining or in general, such that may impact materially negatively on Delek Refining. E. Credit restrictions From time to time, the financial ratios of Delek USA and its subsidiaries (Delek Refining, Delek Marketing, Delek Finance and MAPCO) are close to non-compliance with the financial covenants stipulated and this, inter alia, due to fluctuations of Delek USA/subsidiary, amount of funds withdrawn as dividends by Delek USA, level of leveraging of Delek USA/subsidiary and relevant market conditions. Non compliance with said financial covenants may lead to the significant amounts of credit Delek USA has to be called in for immediate repayment and may prevent the receipt of additional credit in accordance with the warranties of the lenders/ Failure to comply with the financial covenants is therefore a risk factor for Delek USA. As of the report date, Delek USA is in compliance with all the financial covenants that apply to it and its subsidiaries, and there were no issues of non-compliance during the periods described in the report. Following are details of the main financial covenants with which Delek Refining is required to comply, as determined in order to secure the New Credit Facility described in section 1.7.15A which was granted by a consortium headed by an American bank: − Adjusted surplus of current assets less minimum of financial obligations ("Credit Margin") throughout the entire credit period. Delek USA provided a guarantee of up to $15 million to the consortium should Delek Refining fail to comply with the terms of the credit facility. − If the credit margin is less than the amount between $15 million or 10.5% of the adjusted value of the base assets used as security for the loan (cash, receivables and inventory in transit), the following covenants shall come into effect: (1) Delek Refining must comply with a ratio (EBITDA less capital investments) / (interest expenses + planned payment of loan principal + income tax payments) greater than the amount set in Delek Refining’s loan agreement; (2) There are various restrictions on the distribution of dividends and repayment of the loan to Delek USA.. − The assets of the Refinery were charged to the consortium, however should Delek Refining borrow over $100 million in respect of this equipment, the charge will be removed, with the exception of $50 million. Following are details of the main financial covenants with which Delek Marketing undertakes to comply in connection with the credit facility described in section 1.7.15A2 above, short term, in the amount of approximately $75 million. − Equity value should be higher than approximately $30 million.

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− (EBITDA less current investments) / (interest expenses + planned payment of loan principal + income tax payments) will be greater than 1.2. − The ratio of debt to the cash flow from current operations EBITDA will be lower than 3.5. Following are details of the main financial covenants with which Delek USA and Delek Finance undertake to comply in connection with Delek USA's and Delek Finance's credit facility and loans. − Adjusted equity value should be greater than $425 million. − The ratio of adjusted equity to assets will be greater than 0.3. − The ratio of net debt to the cash flow from current operations EBITDA will be lower than 3.0. In addition to said financial covenants, the credit agreements include numerous non-financial stipulations and restrictions, as is standard for such agreements, including restrictions on transfer of funds, distribution of dividends, investments, sale of assets, transactions with related parties and the like. F. Changes in the prices of commodities (especially crude oil and fuels) and the interest rate are the main market risks faced by Delek USA. To protect against fluctuations in the prices of commodities, Delek USA, from time to time, enters into futures contracts. As at December 31, 2008 and 2009, the total of open contracts was not material. Additionally, Delek USA occasionally enters into interest rate swap contracts. As at December 31, 2008 and 2009, the use of said contracts was not significant. Entry into financial instruments for the performance of hedging involves exposure to financial losses should there be unexpected fluctuations or deviations in prices, and exposure to credit risk of the parties with who the contract is closed. 1.7.16 Charges In order to guarantee the New Credit Facility, Delek Refining placed a charge on all the inventories, receipts receivable from customers, accounts, rights under letters of credit, equipment and more in favor of a consortium headed by an American bank. Additionally, Delek Refining has a negative charge on the Refinery’s equipment. To guarantee loans from Israeli banks, a charge was placed on Delek USA’s shares in Lion Oil. To secure the credit Facility, Delek Marketing placed a charge on all its assets in favor of an American bank. 1.7.17 Taxation Delek Refining and Delek Marketing are wholly owned subsidiaries of Delek USA and therefore their financial statements for tax purposes are consolidated with those of Delek USA and are subject to the tax laws that apply thereto. For details of the tax laws to which Delek USA is subject, see Note 43 to the Group’s financial statements and section 1.7.37 below. Delek USA expects a tax return of approximately $35 million in 2010. 1.7.18 Environmental protection Delek Refining is subject to environmental protection laws, regulations, ordinances and permits determined by the competent authorities in the segment of operation, at the federal, state and local levels, and in particular the Environmental Protection Agency ("EPA") and the Texas Commission on Environmental Quality (“TCEQ”). Delek Marketing is also subject to environmental protection laws, however as it purchases finished fuel products, it is subject to significantly less regulation. The main environmental protection legislation relating to Delek Refining’s operations relates to air quality, quality of liquid waste, solid/toxic waste and the prevention of ground and groundwater contamination, including the following: A. Provisions of the Federal Clean Air Act ("CAA") – an air quality control law – and state and local laws and regulations which govern the permitted level of emissions of certain substances which have a direct and indirect influence on refinery operations. CAA licensing requirements and/or control requirements relating to the permitted emissions levels of certain air pollutants can have a direct influence on refining operations. The CAA has an indirect influence on refining operations through comprehensive regulation of emissions of sulfur dioxide and other substances, including nitric oxide and other compounds emitted by cars, factories and other transportation vehicles that use Delek Refining products. In addition, the unstable organic compounds emitted by the Refinery are heavily regulated, including compounds such as benzene. With regard to benzene, it should be noted that the EPA issued final regulations regarding changes in the formulation of benzene which will require an additional reduction in

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benzene content by January 2011 and maximum reduction in benzene content by July 2012. Should Delek Refining fail to comply with the second part of the regulations, it will have to purchase credit points from other refineries if they are available or if they can be purchased at reasonable prices. The CAA imposes strict limitations on the substance emissions, is setting up a federal program which requires operating licenses and enables the imposition of enforcement sanctions, both civil and criminal. The CAA also determines the final dates for implementation of the control standards and requirements based on the severity of air pollution in a specific geographic area. Legislative initiatives and regulation to handle issues relating to climate change and the emission of greenhouse gas are in various stages of discussion and implementation. These initiatives include federal and state regulation. In June 2009, the US Congress approved the American Clean Energy and Security Act of 2009, which limits the emission of greenhouse gas and increase the costs of using carbon-based fuels. The US Senate began work on its own legislation in this regard. Although at this time it is not possible to know the requirements of the legislation and regulation, it can be assumed that they will lead to an increase in costs and negatively impact on the worthwhileness of purchasing the Refinery’s products. B. The Federal Clean Water Act 1972 ("CWA") influences refining operations by imposing restrictions on the discharge of liquid waste and rainwater into certain water reservoirs. Compliance with the stipulations of control, standards and regular reporting required by law is a precondition for the receipt or renewal of licenses which permit the discharge of liquid waste and rainwater into the water. The state of Texas has similar laws and regulations. The Refinery currently has the license required for the discharge of waste in compliance with the National Pollution Discharge Elimination System Program. The Refinery also operates in accordance with internal plans overseeing the efforts to comply with the abovementioned laws. In addition, at the federal level, the Refinery is governed by the Oil Pollution Act, which amended the Clean Water Act. The Oil Pollution Act stipulates, inter alia, that in respect of public water reservoirs, owners or operators of a facility or tanker must have a contingency plan to deal with spills or leaks of oil and/or oil products. Delek Refining has developed and implemented such a plan in each of its facilities to which the Oil Pollution Act applies. In addition, in the event of such a leak, the Act states that the companies responsible will bear the cleaning and purification costs and it imposes heavy civil fines as well as criminal sanctions for breaking the law. The State of Texas has passed legislation similar to the Oil Pollution Act. C. Delek Refining is also subject to the Resource Conservation and Recovery Act ("RCRA") which dictates the manner of handling, storage, elimination and remediation of hazardous waste. The State of Texas has similar laws and regulations which are even stricter. Where possible, RCRA substances are recycled directly in a manner permitted by the Act. The RCRA determines standards and procedures for the handling of hazardous solid waste. Above and beyond the procedures for handling the storage and elimination of waste, the RCRA relates also to the environmental effects of past waste elimination, waste recycling, and the controls for the introduction into and elimination from underground reservoirs of hazardous materials. In addition, new laws and regulations are being enacted by various supervisory bodies in an ongoing process. D. The Comprehensive Environmental Response Compensation and Liability Act ("CERCLA"), the RCRA and state laws impose liability on certain groups of people, regardless of the question of responsibility or legality of the original deed, in respect of the discharge or the possible discharge of hazardous materials into the environment. These people include the owner and/or operator of the site where the hazardous substances were discharged, and the companies which discharged or organized the discharge of the hazardous materials. Under CERCLA these bodies may be jointly and severally liable for payment of the costs entailed by a cleanup of the hazardous materials discharged into the environment, payment of compensation for damage to natural resources, and cost of certain health studies. It is not uncommon for owners of neighboring lands or third parties to file actions for damage allegedly caused to body and property by hazardous materials or other pollutants discharged into the environment. In addition, state laws impose similar duties and responsibilities. Waste is produced by the Refinery as part of its ongoing operations. As of the report date, Delek Refining has not been recognized as a potentially liable party under CERCLA and has not borne any liability whatsoever regarding the discharge of pollutants and environmentally hazardous materials, should such have applied prior to its purchase of the Refinery.

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E. The Energy Policy Act of 2005 requires refineries to increase the amount of renewable fuel that must be mixed with gasoline by 2012. The final rules for application of this law exempt small refineries, such as the Delek Refining Refinery in Tyler, from compliance with this law until 2010. The Energy Independence and Safety Act (“EISA”) of 2007 increased the quantity of renewable fuel that refineries had to produce under the EPA. The EPA bill for implementation of EISA will require large amounts of refined products to be replaced by biofuel, approximately 7.5% in 2011 to 18% in 2022. The bill may lead to a decline in the amount of crude oil processed and impact materially on the profitability, unless the demand for fuels grows concurrently or that other places for the transferred products are found. Despite the current exemption, the Tyler Refinery began producing an E-10 mixture of gasoline and ethanol in January 2008. F. In June 2007, the Federal Occupational Safety and Health Administration ("OSHA") announced a national program to address hazards in oil refineries. As part of the program, OSHA inspected the Tyler refinery after the fire and imposed a fine of approximately $200,000 on Delek Refining. Delek Refining appealed the decision, and does not believe that this will not have a detrimental effect on it. G. Additionally, The Chemical Safety Board (“CSB”) also demanded information regarding the fire, and the EPA requested information regarding our compliance with the requirements of the standards for the prevention of chemical accidents under the EPA. Both investigations are still ongoing. H. Material investments in environmental protection 1. Delek Refining is currently unaware of any pollution of land or ground water requiring investigation or clean-up in the area of the pipeline, but a need could arise in the future to perform assessments and clean-up of the pipeline area. Based on environmental assessments carried out by third parties when the Refinery was purchased and which were recently updated, Delek USA recorded in its books a liability of approximately $7.5 million for estimated clean-up costs at the Refinery site, at December 31, 2009. Based on the foregoing, an expense of $2.2 million is expected in the coming year, and the balance in 2022. Current and future environmental protection regulations, as well as other situations requiring reporting and action, could necessitate significant additional investigation and cleanup expenses. Efforts to purify the groundwater at the Refinery are expected to continue in the foreseeable future. 2. It should also be noted that Delek Refining has insurance in the form of environmental pollution policies which cover certain pollution damage claims and cleaning and purification costs in connection with the Refinery (but do not include, for example, cleaning costs resulting from historical environmental damage). At the date of this report, no material claims have been filed in connection with these policies. 3. Below is a list of the Refinery’s investments in environmental protection issues in 2008, 2008 and forecast for 2010, in USD millions: Forecast for Year 2008 2009 2010 Environmental protection and regulation 37.8 18.4 32.8 4. This information regarding Delek Refining’s estimates for investments in environmental protection is forward-looking information. The information is based on the EPA requirements at this time, the extent of pollution of which Delek Refining is aware at this time, and its estimates regarding the amount of investment that will be required to handle environmental protection issues, in light of its experience. The information may not materialize, inter alia, if changes are made in the EPA requirements or other relevant regulation, if Delek Refining finds new environmental protection issues that need to be handled and if while making the investments or prior to that time it is found that the costs of the investment are higher than expected. Delek Refining estimates regarding investments in environmental protection and regulation depend on estimates and factors that are uncertain, including the complexity of the provisions regarding environmental protection and the various ways they can be interpreted, the possibility of discovering polluted areas and precisely estimating existing pollution or pollution that may be discovered considering, inter alia, that it is an old

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refinery, there is a lack of credible information regarding the extent of clean-up work required to purify the pollution and the lack of certainty regarding the selection of the appropriate cleaning method from amount the possibilities existing at that time. Additionally, the legislation and regulations for environmental protection change and are revised frequently, and changes to them may impact on the above assessment. As of the date of the report, to the best of its knowledge Delek Refining is in material compliance with environmental protection requirements. 1.7.19 Restrictions on and supervision of Delek Refining’s operations A. Business licenses Delek Refining and Delek Marketing operate under many licenses which they have obtained for their operations, such as licenses under various environmental laws (waste disposal licenses), pipeline operator license for the transportation of fuel, etc. B. Standardization of fuel products The EPA has the authority to enact regulations regarding production standards for petroleum distillates. The EPA promulgated regulations limiting the maximum permitted quantity of sulfur emitted by the use of gasoline in vehicles used for transportation. These standards stipulate that the average quantity of sulfur permitted in gasoline distillates cannot be higher than 30 ppm in one single calendar year, and that after January 1, 2006 one gallon of gasoline shall not contain more than 80 ppm. Further to discussions between the Refinery, the EPA and the US Department of Justice since 2004, regarding the requirements of the CAA with respect to the operations of the Refinery, in September 2009, an agreed order entered into effect. The order did not allege violations by the Refinery after its acquisition by Delek USA, and the fine was imposed on the previous owner. According to the order, investments in the Refinery were required, some of which have been completed and the cost of the remainder is not expected to be material. C. Other 1. Delek Refining is subject to the Federal Occupational Safety and Health Act (“OSHA”) and other similar state laws that regulate safety and health conditions for employees, including the manner of dealing with hazardous materials. 2. Delek Refining is subject to federal and state laws in matters of wage protection, overtime, work conditions and civic matters. It should be noted that to the best of Delek Refining’s knowledge, from time to time there are federal bills which propose to raise the minimum wage and require employers to provide health insurance for their employees. If such bills are passed, they could have a negative impact on Delek Refining’s results. 1.7.20 Legal proceedings Delek Refining and Delek Marketing are not involved in any material legal proceedings. 1.7.21 Targets and business strategy Delek Refining and Delek Marketing examine their plans and strategic goals from time to time and update them in accordance with developments in the fuel market, in the competition map and macro-economic influences on its activities. The activities of Delek Refining in the coming years are expected to concentrate on the following: A. Delek USA’s growth strategy since its establishment is through acquisitions. In the coming years, Delek USA is expected to examine potential acquisitions, including acquisition of additional refiners or other supplemental assets, such as pipelines or terminals. The acquisition of complementary assets, as aforementioned, may be in the area in which Delek Refining operates, and may be in other regions of the US. B. Expansion of the customer base and improvement of the Refinery’s profitability, primarily by increasing the refining capacity of Delek Refining, the marketing efforts of Delek Refining to expand its customer base, and reducing production costs. The Refinery is located in Tyler, Texas, and is the only fuel product supplier within a 100-mile (161 km) radius. Delek Refining has expanded and is continuing to expand its customer base. In addition, Delek Refining is working to obtain better contractual terms with its customers. C. Investment in facilities to improve Delek Refining’s ability to process more acidic and heavier crude oil.

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D. Implementation of projects such as a facility to produce low sulfur gasoline as stated above, and projects leading to lower crude oil refining costs and therefore more efficient and better use of its refining facilities, will increase the production capacity of the Refinery and the quality of its products. 1.7.22 Risk factors The main risk factors in the operations of Delek Refining and Delek Marketing are these: A. Dependence on a single asset – Since all of the refining operations are concentrated at the Tyler refinery, significant disruptions in its operation could have a detrimental effect on Delek Refining. Said risk factor materialized on November 20, 2008, with the explosion at the Tyler Refinery, following which it was shut down through May 2009. The dependence on the Refinery may also be expressed through incidents such as natural disasters, work accidents, loss of licenses and the permits required for the factory’s activity, maintenance, etc. B. Exposure to changes in the prices of raw materials and products – Delek Refining is exposed to changes in the prices of its raw materials and in the sales price of its fuel products to its customers. From time to time, Delek Refining makes hedging transactions by means of derivatives to reduce its exposure to these risks. However the scale of said transactions differs from time to time and they involve various risks. On this point it should be noted that Delek Refining's competitors include multi-national companies with integrated capabilities significantly larger than those of Delek Refining, which, because of their size, the integrated nature of their operations and their complex refineries, are better able to withstand the vagaries of a changing market. A significant rise or fluctuations in crude oil prices might have a detrimental effect on Delek Refining's profitability, especially with respect to products such as asphalt, propane and others, which are produced by Lion Oil, since their prices are not correlated with the fluctuations in crude oil prices. C. Refining margin - Delek Refining is exposed to changes in the refining margin. A rise in the refining margin leads to a corresponding increase in profitability, while a smaller refining margin will reduce profitability. D. Legislative developments and changes and environmental protection issues – Delek Refining is subject to various laws, standards and regulations relating to its refining operations, mainly in connection with environmental protection matters. It is therefore exposed to developments, changes and new legal requirements, and the possibility that in the future, material deviations will be discovered or new and more stringent legal provisions will be added, thus incurring financial costs. It is estimated that to comply with the new environmental standards, Delek Refining's investments in this area will be approximately $32.8 million in 2010. E. Operational risks - The refining operation is exposed to inherent risks related to the refining of fuels and supply of fuel products. These risks include, among others, natural disasters, fires, explosions, pipeline leaks, accidents of the fleet of trucks for transport of the fuels, third- party intervention and other events that are beyond Delek Refining’s control and that could disrupt the Refinery’s operations, pollute and damage the environment and third-party property, cause injury suits and even death. As the entire refining operation is performed in a single refinery, each of these risks could disrupt the Refinery’s activity and cause significant damage. Two employees were killed and several other people were injured in the incident at the Refinery on November 20, 2008. All of the proceedings related to it are still not complete, and it may expose Delek Refining to various proceedings in the future as well. F. Terror attacks and war – Terror attacks in the United States as well as a war in countries with large oil reserves could impact negatively on Delek Refining's operations. As the owner of a Refinery and an oil pipeline, Delek Refining could have greater exposure to terrorist attacks. Furthermore, terrorist attacks could lead to a sharp rise in global oil prices, thereby harming both demand for the various oil products and Delek Refineries' gross profitability. G. Limited pipeline infrastructure - The pipeline transporting crude oil to the Refinery has limited capacity which could become insufficient if the Refinery increases its output significantly. Moreover, Delek Refining has no pipelines for the delivery of its fuel products, and in 2009, about 100% of its sales were made at its own terminals. This could impede the recruitment of new customers. H. Existing debt and financing of activity – Delek Refining and Delek Marketing have significant debt, the largest part of which is scheduled for repayment in the short term (2010 and 2011). It is not certain that Delek USA will be able to refinance its loans, renew credit

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facilities and secure new financing, at the time required and with good conditions. This leveraging has various negative implications, including great exposure to negative conditions in the market and industry, the need to use cash flow to pay debt and the restriction of business flexibility in existing activity and entry into additional activities. Difficulties in servicing the existing debt and financing the activity may hurt relations with suppliers, lead to poor conditions in the contracts with them, and hurt the company’s business operations. In this regard it is important to emphasize that the ongoing economic and financial crisis may have a materially negative impact on banks and restrict the accessibility required to raise capital and debt. I. Compliance with financial and other covenants – Current and future credit agreements that include financial covenants may negatively impact on the ability to finance future activity, conduct business and may mandate early repayment of loans in significant amounts and make it difficult or prevent receipt of additional financing. At times, Delek USA is close to non- compliance with the financial covenants that apply to it. Compliance with financial covenants depends, among other things, on factors such as level of leverage, profitability, relevant market conditions and more, such that deterioration of various parameters may hurt Delek USA’s ability to comply with the financial covenants or to remedy them if necessary. This is, inter alia, due to the current crisis in the credit market and the general deterioration of market conditions. Additionally, by virtue of the credit agreements, various stipulations and limitations apply to the company and may impact negatively on its ability to perform various operations such as distribution of dividends, sale of assets, entry into new activities, investments, etc. J. Insurance – Delek Refining and Delek Marketing have insurance policies, including property policies with coverage of up to 1 billion. Nevertheless, Delek Refining could sustain damage that is not insured, or which cannot be insured under its policy, or that is higher than the sums insured by the policy. For example, the business interruption policy does not apply unless the interruption extends beyond 45 days. The company cannot ensure that the terms of the insurance policies will not change for the worse or if they will be renewed by the insurers. Additionally, the explosion in Tyler on November 20, 2008 caused extensive damage to property and the shutdown of the factory’s operations. The size of the claim may impact on the terms of renewal of the policies. K. Dependence on employees – Most of Delek Refining’s Refinery employees, as well as 39 truck drivers, are unionized and subject to collective employment agreements. The collective agreement with the Refinery workers and drivers will expire in January 2012. Also, although these collective agreements contain conditions for strike prevention, there is no certainty that there will be no strikes or work stoppages. A strike or work stoppage could have adverse effects on Delek Refining’s operations. L. Material supplier – In 2009, Delek Marketing obtained all its fuel products from the Magellan and Northville. This means that Delek Marketing is dependent on those companies, and termination of the supply agreements for any reason could harm its results. M. General economic conditions and the financial crisis – The local economic slowdown could have a detrimental effect on business and on the results of operations due to falling consumption levels. Some of the factors influencing the decrease in consumption are general economic conditions, unemployment, consumer debt, net worth reductions based on plummeting markets, real estate values, mortgage markets, taxation, energy prices, interest rates, consumer trust, and other macroeconomic factors. During this period of economic uncertainty, consumers might minimize travel, consumption levels, and so on. Additionally, the current economic crisis impacted significantly on economic bodies that reduced the accessibility of companies to capital and credit and makes it difficult for Delek USA to receive financing for its activities or to receive financing at poorer conditions than in the past. The foregoing may also negatively impact on Delek USA’s ability to repay its loans on time. N. Changes in dollar interest rates – Delek USA, Delek Finance, Delek Refining and Delek Marketing's combined credit debt at December 31, 2009 is $137.5 million. They are exposed to changes in the interest rates paid by Delek Refining on these loans. Delek USA manages this risk by means of interest agreements which change the interest characteristics on most of the long-term loans. O. Inability to control the operations at Lion Oil – Delek Refinery holds 34.6% of Lion Oil shares. Approximately 53.7% of Lion Oil shares are held by a single shareholder, who is a party to a management agreement with Lion Oil and has the right to select most of its directors. In light of the foregoing, Delek Refining is not able to control Lion Oil operations. As

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long as there is a single shareholder with management rights, that shareholder will continue to impact the composition of the board of directors and Lion Oil's policies (including as pertain to the announcement of dividends, preparation of financial statements and their dates) and to determine, without need for Delek Refinery's consent, the results of a transaction or any other material issue presented by Lion Oil’s shareholders. P. Non-liquidity of the investment in Lion Oil – Since Lion Oil is a private company there is no market for its shares. As a result, it is uncertain that Delek USA will be able to increase or reduce its holding in Lion Oil or in the event that it so wishes, to do so on preferred terms and at preferred prices. Q. Following is a summary of the above-mentioned risk factors by type (macro risks, sector risks, risks specific to Delek Refining and Delek Marketing) which have been rated based on an estimate by Delek USA, according to their impact on Delek USA – large, medium or small.

Impact of risk factor on Delek USA Major impact Medium impact Minor impact Macro Risks 1. Economic slowdown in 4. Changes in dollar global or local market. interest rate 2. Terror attacks and wars 3. Insurance Sectoral Risks 5. Refining margin 7. Exposure to changes in the 6. Developments and prices of raw materials and changes in legislation products and environmental 8. Operational risks issues Risks specific to 9. Dependence on 12. Limited pipeline 16. Dependence on Delek Refining and single asset infrastructure employees Marketing 10. Compliance 13. Major supplier with financial and 14. Inability to control other covenants Lion Oil activities 11. Existing debt 15. Non-liquidity of and financing investment in Lion Oil operations

The degree to which the risk factors affect the refining business is based on estimates only; the actual impact could be different. 1.7.23 Fuel Products and Convenience Stores in the USA This activity covers the marketing and distribution of fuel and oil products, as well as the operation of gas stations and convenience stores. The operations are carried out by MAPCO. At the report date, US operations are centered in eight states in the southeastern USA (mainly Tennessee, Alabama and Georgia). The gas stations and convenience stores were acquired through a series of transactions, the first of which was in 2001 and the last of which in 2007 (107 gas stations and convenience stores in Georgia and Tennessee).

1.7.24 General information about the fuel product and convenience store activity A. General environment and effect of external factors MAPCO’s operations are exposed to trends, events and developments in the fuel market in its areas of operation, which have or are likely to have an impact on its operations and its competitors, including these: 1. Fluctuations in global fuel prices – The price MAPCO pays for its fuel products is derived from the price of fuel on global markets, and is therefore exposed to fuel price changes in these markets. Among the factors that influence fuel prices are changes in the state of the global and local economy, demand for fuel products inside and outside the USA, the world political situation in general and in the oil-producing regions in particular (the Middle East, FSU, West Africa and South America), production levels of crude oil and petroleum distillates in the USA and worldwide, development and marketing of fuel substitutes, interruptions in supply lines, local factors including market and weather conditions. The rise in fuel prices worldwide causes a rise in the prices of products sold by MAPCO, may reduce demand for these products, as well as hurt MAPCO’s profit on every product sold.

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In 2009 there was a significant decline in revenues from fuels, inter alia, as a result from a decline in fuel prices (an average of USD 2.24 per gallon in 2009 compared to an average of USD 3.19 in 2008) (see also section 1.7.24D). 2. The economic situation – Total MAPCO’s sales in convenience stores as well in the marketing of fuel products is influenced by the economic situation in its areas of activity in the southeastern USA, so that deterioration in the economic situation in these areas may have a negative impact on MAPCO’s operations. The financial crisis in the USA led to a general decline in demand for fuel products and retail products in the convenience stores, and as a result to a significant drop in sales of these products by MAPCO (see also section 1.7.24D). B. Structure and changes in the segment of operation 1. At December 31, 2009, MAPCO’s operated 442 gas stations and convenience stores in eight states in the southeastern USA.1 MAPCO’s operations are centered in Tennessee (239 stores), Alabama (93 stores), Georgia (81 stores), Arkansas (13 stores) and Virginia (9 stores). The seven other stores are located in Kentucky, Louisiana and Mississippi. MAPCO has ownership rights (owns or leases/rents) in 457 convenience stores, where it owns 254 of the gas stations and leases/rents 203 (of which 15 are stations operated by third parties). About 75% of the stores are concentrated in Tennessee and Alabama. Additionally, as at the report date, MAPCO markets fuel products to approximately 55 stations operated by third parties. For details of the ownership and operational status of the gas stations, see section 1.7.31C. 2. In 2007 – 2009, MAPCO reopened, upgraded and improved more than 70 stores in the different states, including introducing premium products, convenience products and opening bars. It plans to continue to do so for additional stores in 2010. 3. The gas stations and convenience stores are operated under the MAPCO Express®, MAPCO Mart®, Discount Food MartTM, Fast Food and FuelTM, East Coast® and Favorite Markets brands, with the branded stations selling branded fuel products of Shell, Conco, ExxonMobil, BP and Marathon. 4. At most (all but three) of the gas stations in the USA, MAPCO also operates convenience stores, integrating the sale of fuel products with convenience store operations, and customers make purchases from the convenience stores as well as from the gas stations. 5. The activity is influenced by the long period of time required to license and set up gas stations, the difficulty in locating and setting up new gas stations, regulatory restrictions in the market, and the competition between the fuel corporations and retail chains in all areas of their operations. 6. In December 2008, the process to allow the sale of 36 stores in Virginia was completed. In 2008, revenues of USD 9.8 million were received in respect of the sale of 12 stores, and in 2009 revenues of USD 9.3 million were generated in respect of the sale of 15 stores. Nine of the remaining stores were put back into normal operation. C. Competition structure and customer characteristics 1. MAPCO operates in the market alongside the large fuel corporations, independent convenience store chains, drugstores, fast food chains and the large supermarkets such as Wal-Mart, whose market share is relatively large compared to MAPCO’s and which also sell fuel and oil products (see section 1.7.29). MAPCO’s convenience stores operate under a number of brands and MAPCO intends to brand some of its stores under the MAPCO Mart brand name in the next few years. For further information, see section 1.7.29. 2. MAPCO sells its products to occasional customers who visit the gas stations. MAPCO also operates a fuel credit card service, but this is insignificant in scope. D. Changes in the volume of operations and profitability In 2009 there was a decline in revenues and in gross profit from sales of fuel products compared with 2008. There has been no material change in total revenues and rate of gross profit from sales of retail products. See section 1.7.26 below.

1 MAPCO also distributes fuel products to third parties in an additional state.

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E. Changes in supplier and raw material chain As described in sections 1.7.27B and 1.7.33A, MAPCO’s largest supplier of fuel products in 2009 was Valero, from whom it purchased 21% of fuel products compared with 29% in 2008. For more information on the agreements for purchase of branded fuels and the significance of fuel branding, see section 1.7.33A. F. Critical success factors MAPCO estimates that the critical success factors in the activity are these: 1. Widespread deployment of gas stations and convenience stores in MAPCO’s area of operations. 2. Financial stability enabling the purchase of new gas stations and convenience stores, investments in setting up new stations and refurbishing and expanding existing stations. 3. Integrating convenience stores and retail centers into gas station spaces. 4. Title to the real estate on which the gas stations are built. 5. Efficient information systems that provide information in real time for management, inventory, pricing, sales and security. 6. Volume of mixing ethanol with the fuels marketed by MAPCO. G. Entry and exit barriers Key barriers to entry into this activity are these: 1. The high financial costs associated with the acquisition, location and setting up of gas stations, which are affected by the construction standards applicable to gas stations. 2. Regulatory restrictions in the sector, including legislation and standardization in planning, construction and environmental protection. 3. Competition with other gas companies and retail chains in all the areas of their operation, and against small competitors with lower costs of operation. 4. Requirement for significant sources of credit to finance the acquisition of inventories of fuel products and convenience stores. The main exit barrier is the long-term leasing/operating contracts with landowners. 1.7.25 Products and services The products marketed by MAPCO are primarily fuel products, retail products sold in the convenience stores, including tobacco products and alcoholic beverages, (state) lottery tickets, money orders and cash withdrawal services (ATM). Some stores sell fast food of companies with recognized brands. A. Fuel products MAPCO sells white distillates, including various types of gasoline and diesel as follows: 1. Various types of gasoline – used as fuel in vehicles with gasoline engines and sold mainly at gas stations. 2. Diesel – used mainly in diesel-powered vehicles as well as for heating and industry. 3. Blended products – In 2008, MAPCO commenced distribution of E10 products (gasoline blended with ethanol). B. Retail products The convenience stores sell various retail products, mainly tobacco products (mostly cigarettes), beer, soft drinks, food (including ready-to-eat), candy, snacks and many other products, including MAPCO’s own private label products. Some of the stores sell lottery tickets and money orders and operate ATMs.

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1.7.26 Segmentation of revenues by products and services A. The table below shows the amount and percentage of revenues from MAPCO’s sale of fuels and retail products in the past two years: 2009 2008 % of Delek % of Delek NIS USA % of Group NIS USA % of Group millions revenues revenues millions revenues revenues Fuels 4,070 72.9% 9.4% 4,933 78.8% 10.7% Retail products 1,519 27.1% 3.5% 1,327 21.2% 2.9% Total 5,589 100% 12.9% 6,260 100% 13.5%

B. The following table shows the amount and percentage of gross profit from MAPCO’s sale of fuels and retail products in the past two years: 2009 2008 % of Delek % of Delek NIS USA % of Group NIS USA % of Group millions revenues revenues millions revenues revenues Fuels 242 34% 3.8% 299 41.6% 5.3% Retail products 468 66% 7.3% 419 58.4% 7.4% Total 710 100% 11.1% 718 100% 12.6%

The gross profit from the sale of retail products is higher than from the sale of fuel products. 1.7.27 Customers MAPCO’s principal customer group (approximately 95%) is a group of private consumers who purchase fuel products or retail products at the gas stations and convenience stores. In addition, MAPCO markets fuel products to about 55 stores operated by third parties. 1.7.28 Marketing and distribution Following is a brief description of MAPCO’s marketing methods: A. Marketing in gas stations – MAPCO promotes its products and services in a number of ways: regional campaigns and specific offers in specific stores and the use of sales promotions. MAPCO also advertises in the media. B. Agreements for the purchase of branded fuels – In about 45% of MAPCO-operated gas stations, MAPCO is bound by exclusive agreements with the energy companies – Shell, Conoco, Chevron, Exxon Mobil, Marathon and BP – for the purchase of fuel products and the use of their brand names. These agreements are for periods of from one to 15 years and are at various stages of their lives. In 2009, 21% of its fuel products were purchased from Valero under an agreement whose term ends in the second quarter of 2010. On the basis of these agreements, MAPCO can benefit from the marketing efforts and brand name strength of the above companies. The agreements to purchase branded fuels were signed as part of the agreements for the purchase of the gas stations. Since it is possible to convert the stations so that they operate under the MAPCO name, termination of the agreements will not materially influence its operations. MAPCO does not believe it is dependent on any particular supplier. 1.7.29 Competition A. To the best of MAPCO’s knowledge, it is one of the five companies with the largest number of gas stations in the areas of its operation in Nashville, Chattanooga and Memphis (Tennessee) and in northern Alabama. The two other large companies in Nashville are Daily’s, Exxon and Kroger. The two largest in Memphis are Couche Tard and Exxon Tigermarkets. The other two large companies in northern Alabama are Murphy Oil and Pantry. The other large company in eastern Tennessee and northern Georgia is Pantry. B. MAPCO has many competitors, primarily the large gas station chains, the other convenience store chains, local and independent gas stations and convenience stores, supermarket chains such as Wal-Mart, various retail chains and fast-food chains. MAPCO has no accurate data regarding its market share and that of its competitors.

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C. Competition in gas stations and convenience stores is mainly local, from rival gas stations, convenience stores and businesses in the region. This competition is expressed mainly by competition for location, ease of access, price, range of products and services offered, customer service, branded fuels, store appearance, cleanliness, safety and regular supply. D. Below is a description of the main ways MAPCO copes with the competition and factors affecting its competitive status. 1. MAPCO is working to broaden its deployment of gas stations and convenience stores in its areas of operation, as well as in adjacent areas. The high concentration of MAPCO gas stations in its areas of operation allows it to be an influential factor in the local market and to operate with a relatively small and efficient staff. Identifying opportunities for initiatives and acquiring additional gas stations and stores, including opportunities to purchase chains, is the responsibility of MAPCO’s senior management. 2. MAPCO is working to expand its range of products and product quality, in accordance with identified trends. MAPCO also offers ready-to-eat food products at its convenience stores under its own GrilleMarx brand,1 and at present 12 stores offer this service. 3. MAPCO is investing in improving its information technology, including investments in computerization and management software. The use of information systems to manage the supply, inventory and security systems is designed to achieve efficient management, including proper pricing of products on a daily basis, taking into account the data of each station, identifying demand and keeping appropriate levels of inventory. 4. Most of MAPCO’s gas stations are located in relatively central locations in its areas of operation, which increases ease of access to them. 1.7.30 Seasonality The demand for fuel and other products is generally higher in summer than in winter. Consequently, MAPCO’s operating expenses are lower in the first quarter of the year. 1.7.31 Plant, property and equipment and facilities A. At the date of the report, MAPCO owns 247 gas stations and convenience stores. In addition, it leases/rents another 195 properties, mainly under long-term contracts of up to 20 years plus an extension option. The aforementioned stores include 15 gas stations and convenience stores leased to third parties. There are also 40 stations operated by third parties and owned or leased by them. B. For details of transactions for the acquisition or sale by MAPCO of groups of gas stations and convenience stores, see sections 1.7.24.B.2 and 1.7.24.B.6. C. The following table shows the ownership rights of MAPCO in the gas stations at December 31, 2009: Number of Number of Number of Number of Number of stations with stations with MAPCO 3rd party Number of leased or leases with leases with operated operated owned rented less than 3 more than 3 State stations stations* stations stations years to run** years to run** Tennessee 239 11 134 110 168 42 Alabama 93 39 61 39 24 14 Virginia 9 -- 1 8 2 6 Arkansas 13 -- 9 4 3 1 Kentucky 3 -- 1 2 -- 2 Louisiana 2 -- -- 2 1 1 Mississippi 2 -- 2 ------Georgia 81 3 46 38 24 14 Florida -- 2 ------Total 442 55 254 203 118 85 * Including 40 stations that are not owned or leased by MAPCO. ** Including options to extend the lease/rental term, as of December 31, 2009.

1 In addition, MAPCO Express has agreements with fast-food companies such as Subway and Quiznos for the operation of stores in some of its gas stations.

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Most of the lease agreements provide that MAPCO will pay property taxes, insurance and station operating costs. For those lease/rental agreements that will end within three years, MAPCO estimates that it can negotiate to extend the agreements for their operation under acceptable terms, should it wish to do so. There are two types of lease agreements, and in most of them MAPCO is responsible for construction of the station and installation of the filling equipment, which it owns. Under these agreements, MAPCO rents the land and is liable for environmental claims connected with its activities. In some of this type of rental agreement MAPCO is responsible for removing underground filling equipment at the end of the rental period. In other cases, MAPCO rents the land as well as the existing filling equipment and structures. In these agreements MAPCO also bears liability for environmental claims connected with its activities. From an operational standpoint, in the case of an external operator of a station in which MAPCO has the proprietary right (ownership or leasing/rental), either the external operator pays rent or they share the margin created from the fuel sales. In the case of an external operator of a MAPCO station in which it has no proprietary right, MAPCO supplies these operators with fuel products only. Revenues from the stations operated by third parties amounted to close to 4.6% of sales of all stations. MAPCO owns a fleet of trucks and tankers that transport approximately half of the fuels sold at is stations. D. In 2007 MAPCO began rebranding some of its convenience stores under the MAPCO Mart brand and continued this in 2008-2009, when it refurbished 51 and 22 stores, respectively. MAPCO believes that this step, alongside the refurbishment and redesign of its stores, will lead to an expansion of its customer base. The investment costs are material, but are spread over a number of years. In 2008 and 2009, the investment, including construction of new stations, amounted to approximately USD 6.8 million and USD 7.4 million, respectively. This information regarding the branding investment cost, store refurbishment and design, is forward-looking information and could change if there are changes in the investment plan, regulatory delays in the receipt of the required permits and approvals, etc. 1.7.32 Intangible assets Delek USA has registered or submitted applications to the US Patent and Trademark Office to register various trademarks, trade names and service marks for use in retail fuel and convenience stores. Delek USA owns the following trademarks registered with the US Patent and Trademark Office: MAPCO EXPRESS & Design MAPCO EXPRESS & Design®, EAST COAST®, GRILLE MARX® CAFÉ EXPRESS FINEST COFFEE IN TOWN MAPCO & Design®, GUARANTEED RIGHT! MAPCO EXPRESS & Design®, FAST FOOD AND FUELTM, FLEET ADVANTAGE® DELTA EXPRESS®, DISCOUNT FOOD MARTTM. In addition, even though MAPCO has not registered or submitted for registration the mark “Discount Food Mart”, it believes that the use of this mark enjoys the particular legal protection afforded to marks which are not registered. The rights to use the brand name MAPCO are restricted to the fuel products and convenience store activity. 1.7.33 Human capital A. The following table details the employee headcount of MAPCO in fuel and convenience stores in 2008 and 2009, by department:

No. of employees at December 31 Department 2008 2009* Head office1 156 168 Regional staff 92 83 Fuel distribution 39 32 Stores and gas stations 3,133 2,952 Total 3,420 3,235 B. C. With the exception of Mr. Uzi Yemin, the CEO of Delek USA, MAPCO employees do not have personal employment agreements, nor are they members of any trade union.

1 It is noted that MAPCO Express HQ includes part of the Delek Refinery head office.

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D. Most MAPCO employees are offered the opportunity to participate in a number of plans that include social benefits, medical insurance and life assurance, which includes insurance for work disability. In April 2006, the Delek USA Board of Directors adopted a long-term incentive policy (“Compensation Plan”). Under the Compensation Plan, Delek USA can grant its employees, consultants, officers and others various types of options, including restricted stock units or share-based rights of up to 3,053,392 options (not including the options of Mr. Uzi Yamin) (jointly, "the Options”). In general terms, the Options under the Compensation Plan are granted at market prices or higher and require a minimum period of employment or provision of services until they can be exercised. Approximately 75% of the Options are granted over a period of 3-5 years and 25% of the Options are granted in one tranche at the end of the fourth year. In 2009, Delek USA issued an alternative tender offer under which the options would be replaced by new options for the purchase of a smaller number of shares at a lower exercise price. A marginal expense was recorded in respect of said change. The condition for exercise of the Options is the continuous service at Delek USA until exercise. These options were allocated by virtue of the Compensation Plan to the employees of Delek Refining (except for temporary workers and those organized in a trade union), MAPCO managers (up to the regional manager level), and officers and directors of Delek USA. Payroll expenses in connection with the stock options plan (as included in the financial statements of Delek USA) at December 31, 2008 and 2009 amounted to US $3.7 million and US 4.1 million. In the years ended December 31, 2008 and December 31, 2009, no options were exercised. As of December 31, 2009, Mr. Uzi Yemin, President and CEO of Delek USA, holds about 3.5% of Delek USA shares, after having been allocated options and shares over the years. At the report date, Mr. Yemin held 1.2% of Delek USA shares and options for the purchase of 3.4% of Delek USA shares. In September 2009, Delek USA entered into a new employment contract with Mr. Yemin for a period through October 31, 2014. For information about the terms of Mr. Yemin’s employment, see Standard 21 in part 4 of the periodic report. 1.7.34 Raw materials and suppliers A. Suppliers of fuel and oil products – MAPCO purchases fuel products from suppliers in its areas of operation. MAPCO’s principal fuel supplier is Valero Marketing and Supply (“Valero”), 1 which in 2008 and 2009 supplied it with about 29% and 21% of its fuel requirements, respectively. In addition to Valero, MAPCO purchases fuel products from other suppliers, mainly Conoco, ExxonMobil, Chevron, Shell and BP and other independent suppliers. B. Suppliers of retail products – in 2009 MAPCO acquired about 59% of the retail products it sells from Core-Mark International Inc. (“Core-Mark”). MAPCO’s agreement with Core-Mark is valid through 2010 with an option to extend through 2013. In addition, MAPCO purchases retail products from Coca Cola, Pepsi Cola, Frito Lay and others. C. For details of the agreements with these suppliers, see section 1.7.40. 1.7.35 Working capital A. Finished-product inventory policy MAPCO’s policy is to generally maintain on average no more than a five-day inventory of fuel products and a 27-day inventory of retail products. The inventory value at December 31, 2008, and December 31, 2009 was approximately US $38 million and US $42 million, respectively. B. Credit policy 1. Customer credit: MAPCO’s policy is not to grant credit to private customers. In certain cases, MAPCO has granted credit to its customers (mainly to out-of-station activity and car fleets), for insignificant amounts. The average customer credit period in 2008 – 2009 was approximately 4 days, respectively. 2. Supplier credit: MAPCO receives credit from suppliers for periods of up to 30 days. In 2008 – 2009 the credit period from suppliers averaged between 13 to 20 days; however, there are some suppliers from which MAPCO does not receive any credit.

1 It should be noted that in 2005 Valero acquired Premcor Refining which signed a fuel supply agreement with MAPCO Express.

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3. The credit that MAPCO receives from its suppliers is more or less sufficient to finance inventories and customer credit. 1.7.36 Financing A. Credit restrictions As part of a senior secured credit facility that included loans and credit lines MAPCO received in April 2005 from a consortium headed by an American bank, MAPCO undertook to comply with financial covenants, the main points of which are as follows: 1. (Total financial debt) to (EBITDA – income from interest) will be as follows:

Period Debt ratio Q1 2005 – Q4 2007 Lower than 4.85 2008 Lower than 4.25 2009 Lower than 3.9 2010 – not including Q4 Lower than 3.9 2010 – as of Q4 Lower than 3.60

2. (EBITDA less current investments) to (interest expenses + planned payment of loan principal + income tax payments) will be higher than 1.20 from the second quarter of 2005 to the fourth quarter of 2008, than 1.25 in the first quarter of 2009 and thereafter. 3. (Cash flow from current operations plus rental fees (EBITDAR) to (interest expenses + rent) will be higher than 1.90 from the second quarter of 2005 to the fourth quarter of 2007, 2.0 in 2008, 1.85 in 2009 and in the first three quarters of 2010 and 2.00 as of the fourth quarter of 2010. 4. (Total financial debt + 8 times rent) to (cash flow from current operations (EBITDA) plus rent) of MAPCO will be lower than 5.60 in the second quarter of 2005 to the fourth quarter of 2007, 5.10 in 2008, 5.35 in 2009 and in the first three quarters of 2010 and 4.85 as of the fourth quarter of 2010. 5. In addition, there are certain limitations on MAPCO’s dividend distribution, mainly these. Total dividend in each fiscal year will be the lower of US $1.5 million or 50% of the cash surplus in the prior fiscal year, without taking into account advance payments of loans taken in accordance with the agreement, provided that the ratio mentioned in sub-section 1. above is no higher than 2.5:1 and the ratio mentioned in sub-section 2 above is higher than 1.25:1, in any occurrence, for the period of the four fiscal quarters prior to the dividend distribution date. 6. At the date of this report, MAPCO is in compliance with the above covenants and has not violated them in the periods described in the report. Most of the financial covenants are reviewed quarterly. B. Liens - MAPCO has collateralized all its fixed assets, including real estate, inventories, cash flows from customers and credit cards, to a consortium headed by the above-mentioned American bank. C. Credit facilities – MAPCO had a credit facility of approximately US $120 million at variable interest of LIBOR + 2.75%, minimum 2.75%. Following the bankruptcy of Lehman Brothers, one of the lenders in the consortium, MAPCO received notice that they would not be able to use Lehman’s share in the credit facility, totaling about US $12 million. In light of that, the effective credit facility was US $108. At December 31, 2009, MAPCO has used approximately US $32.4 million (including letters of credit totaling US $17.9 million). Credit at variable interest – The following table shows the credit at variable interest that MAPCO received under the present loan agreements at December 31, 2009:

Interest range Average Change 1.1.2009 – interest rate Interest rate Loan Type of loan mechanism 31.12.2009 for 2009 31.12.09 (in $ millions) Long-term loan L+4.75%* 3.0%-6.5% 5.63% 6.5% 81.4 (1) Revolver (2) L+4.25* 1.75%-6.0% 5.15% 6.0% 32.4

(1) Libor floor of 2.75%, as at December 31, 2009, interest was P+3.75% (2) Libor floor of 2.75%, as at December 31, 2009, interest was P+3.25%

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*The loan and the revolver (credit facility) were provided as part of the aforementioned senior secured credit facility. According to the original terms of the loan, quarterly payments of principal of US $0.4 million are to be paid, and the balance is to be paid in a single payment on April 28, 2011. Early repayment was also required due to the amount of surplus cash, as defined in the credit agreement. In accordance with said calculation, in March 2009, Delek US repaid close to US $19.7 million and expects to repay approximately US $15 million in March. In the amendment to the senior secured credit facility in December 2009, the facility was extended for one year, through April 28, 2011. The credit facility (of US $108 million) bears interest at predefined levels, and allows a selection between base interest and interest based on the euro/dollar. The average interest rate as of December 31, 2009, was approximately 6.5% for the loan and 6% for the credit facility. In addition, it was required to pay a fee of approximately 0.5% annually on the amount that can be withdrawn from the credit facility (which as of December 31, 2009 was close to US $57.7 million). D. Credit rating – MAPCO has short-term loans and credit facilities that have been rated by S&P and Moody’s at B+- and B3, respectively. E. Securing additional sources of funds – as set out under the risk factors, the current crisis had a highly negative impact on financial institutions and limited access to financing for many companies. MAPCO has, inter alia, credit facilities and a loan of material amounts, which are in effect through 2011, or earlier should there be non-compliance with the financial covenants. According to the senior secured credit facility and the amounts of the debt as of December 31, 2009, in 2011 MAPCO must repay close to US $79.7 million in respect of the loan and about US 32.4 million in respect of the credit facility. These amounts may grow somewhat and the credit facility may be used again. In light of the crisis, it may be difficult to extend the credit facility and loans or obtain alternative financing under terms that are good for MAPCO, if at all, such that this may impact significantly and negatively on MAPCO. Delek USA is looking into various possibilities to secure the funds needed to refinance the debt. 1.7.37 Taxation The financial statements for tax purposes of MAPCO and its subsidiaries are consolidated with those of Delek USA and are subject to the tax laws applicable to it. Furthermore, MAPCO is subject to state tax laws in the various states in which it operates (State Income Tax and Franchise Tax). The tax rates are based upon the value of MAPCO's assets, the volume of its activities and its equity. For the tax rates applicable to MAPCO in the USA, see Note 42 to the Group’s financial statements. Delek USA is held through a wholly-owned Hungarian company, and consequently the tax rates on capital gains, interest and dividends are affected by tax treaties between Israel and Hungary and between Hungary and the USA. The tax rate currently applicable to a dividend between the USA and Hungary is 5%, while the distribution of a dividend from Hungary to Israel is exempt from tax. 1.7.38 Environmental protection A. MAPCO’s operations are subject to various environment protection laws, regulations and orders which may be federal, state or regional and consequently they differ from region to region. The various states issue annual permits for above and/or underground storage tanks. At the federal level, the Resource Conservation and Recovery Act requires that the Environmental Protection Agency (EPA) prepare a comprehensive regulatory program for assessing, prevention and cleaning leakages from fuel reservoirs. The regulations published by the EPA enable the various states to develop, manage and enforce state regulatory programs, provided that they adopt standards which are no less stringent than the federal ones. The EPA, as well as most states, has laid down requirements governing the installation of underground reservoirs, upgrading of existing reservoirs, remedial action in cases of leakages, closing of underground reservoirs, retention of relevant data and retention of evidence regarding financial liabilities stemming from remedial measures, and third-party compensation in connection with bodily harm or property damage caused by leakages. B. MAPCO is a member of state funds that share responsibility for rectifying certain types of environmental damage. In addition, MAPCO has purchased an insurance policy which covers its liability in the event of certain types of environmental damage. In 2008-2009 MAPCO filed no material claims against insurance companies and against the state funds because of underground leaks. At

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the reporting date, the state funds covered some of the damages and MAPCO estimates that the balance of the monies needed for full coverage of damage will be obtained from the state funds. C. MAPCO’s operations are also subject to the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”). This act imposes absolute liability on certain groups of people who are defined as accountable for discharging hazardous materials into the environment. This group of people includes the owner(s) or operator of waste site(s), as well as the company/companies which have disposed of or organized the disposal of the hazardous materials. At the date of this report, MAPCO is not a party to claims under CERCLA. D. Because of the trend developing in environmental issues, there could be additional and more restrictive provisions in connection with MAPCO’s operations which are likely to involve additional expenditure. However, based on the information in MAPCO’s possession regarding the compliance of its operations with existing environmental requirements, MAPCO does not anticipate substantial additional investments in 2010. This information regarding MAPCO’s assessment of the need for additional investments in environmental items is forward-looking information which might not be realized if material deviations are discovered in MAPCO’s operations or if new regulations take effect that will require material expenditure. 1.7.39 Limitations on and supervision of MAPCO operations MAPCO’s operations are subject to laws and regulations including, inter alia, labor laws, regulations governing the sale of alcohol and tobacco products, minimum wage, work conditions, public access roads and additional laws, including: A. Licensing of gas stations and fuel and oil sales – An annual permit for the sale of fuels and oils is issued by the various states in which MAPCO operates (Regulatory Services Permit). In addition, states also issue an annual permit for above and/or underground storage tanks, as mentioned in section 1.7.38A. B. Lottery license – MAPCO is licensed to issue computerized lottery tickets and scratch cards in certain states, under the license it received. C. Alcoholic beverages license – State or local laws restrict the hours during which certain products may be sold, the most significant of which are alcoholic beverages. State and local authorities have the power to approve, cancel, suspend or deny applications for grant or renewal of licenses for the sale of alcoholic beverages, or to impose various restrictions and sanctions. D. Cigarette license – The license to sell cigarettes is issued separately by three authorities: state, county and municipal. This license is granted annually, and in addition, MAPCO must obtain permits for the sale of other tobacco products. E. License to operate convenience stores – Convenience stores are subject to the various federal and state regulations governing health and sanitation, safety, fire, and planning and construction. F. In addition, MAPCO is subject to federal and state legislation in matters related to wage protection, overtime, work conditions and civic affairs. It should be noted that to the best of MAPCO’s knowledge, from time to time there are federal bills proposing a raise in the minimum wage and obliging employers to provide their employees with health insurance. 1.7.40 Material agreements A. MAPCO has agreements for the purchase of fuels with a variety of suppliers and marketers, including the fuel purchase agreement with Valero (from which approximately 29% and 21% of the fuels in 2008 and 2009, respectively) which is valued through the second quarter of 2010/ The prices of the fuels are generally set as a margin of the standard local prices (benchmarks). The terms of the agreements ranges between 1-15 years, and usually the agreements include a minimum purchase amount, monthly or annually. As of this time, MAPCO has complied with most of its purchasing commitments, and recorded minor expenses in respect of non-compliance with it purchase commitments in 2007-2009. B. Core-Mark was the main supplier of retail products in 2008 and 2009, and purchases from it amounted to close to 56% and 59%, respectively. The agreement with Core-Mark is valid until December 31, 2010 and MAPCO has an option to extend it until December 31, 2013.

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1.7.41 Legal proceedings MAPCO is party to various claims and proceedings stemming from its normal course of business. MAPCO believes the final decision in the matters known to it at present will not have a materially negative impact on its financial condition or on its operating results in the future. 1.7.42 Goals and business strategy MAPCO reviews its plans and strategic goals from time to time and revises them in accordance with developments in the fuel market, the competition and macro-economic influences. MAPCO’s operations in the coming years are expected to focus on the following activities: A. Acquisition of additional gas stations and convenience stores in its existing areas of operation, as well as in adjacent areas. MAPCO monitors the operations of its gas stations and convenience stores and is considering assigning gas stations and convenience stores whose performance is poorer than expected to operation by third parties. B. Expansion of the retail operation and product range in the convenience stores, mainly in the area of ready-to-eat foods. As part of this move, MAPCO intends to sell premium products in its stores which it believes will also attract a new target public. Among other things, MAPCO intends to introduce ready-to-eat foods that the customer can order via a touch screen, sell private label foods and offer a larger variety of products. The range of products that will be sold at each convenience store will be determined in accordance with a unique sales strategy for each convenience store, which will take into account its location and customer profile. C. Sale of stations with an asset value that is significantly high compared to the station's profitability. D. As stated in section 1.7.31D, MAPCO is working to strengthen its brands and their recognition as leading brands in the Southeast USA, and to refurbish and redesign its convenience stores, with the goal of enhancing the customer buying experience. MAPCO has begun the rebranding of some of its convenience stores under the name “MAPCO Mart”. In 2009, MAPCO rebranded 22 stores. MAPCO believes that this move, along with the refurbishment and redesign of its stores, will lead to expansion of its customer base. E. Improvement and development of innovative information technology in stores F. Attainment of the above goals and strategy depends on various external factors which might prevent their realization or lead to changes in them. In addition, MAPCO customarily reviews and revises its goals in accordance with developments in the fuel market, the competition map and macro-economic influences. 1.7.43 Risk factors MAPCO estimates that the main risk factors associated with its operations are as follows: A. Competition – High level of competition, including competition with hypermarket chains, particularly in fuels, is reflected in relatively low margins. B. Competition from hypermarket chains – Development of competition in the fuel marketing arena by hypermarket chains. C. Exposure to oil price fluctuations and irregular supply – Impact of fluctuations in oil prices on fuel prices and industry margins. Additionally, irregular delivery of fuels may negatively impact on activity. D. Margin erosion – Risk of margin erosion caused by low growth in supply from US refineries and by a rise in oil prices, with the difficulty of full adjustment of the fuel price to consumers. E. Decline in cigarette consumption – Decline in the consumption of cigarettes (MAPCO’s best selling retail item) and the difficulties of the US tobacco companies that will have an impact on the prices and marketing of cigarettes. Future legislation concerning tobacco products, such as raising cigarette prices or increasing taxation on tobacco products, is liable to have a negative impact on cigarette consumption. F. Environment – The various environmental laws, regulations and orders that apply to fuel companies, and the possibility that in future there will be additional, stricter environmental regulations which could result in financial expenses for MAPCO. G. Dependence on retail product supplier – In 2009 MAPCO purchased 59% of its retail products from one supplier. A change of supplier, disruption in supply or a change in the

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relationship with the supplier could have an adverse effect on MAPCO’s situation. The agreement is material but replaceable. H. MAPCO’s credit limits – At December 31, 2009, MAPCO has loans and letters of credit totaling some US $113.8 million, due in 2011. These liabilities could heighten MAPCO’s sensitivity to negative economic changes; compel it to set aside a substantial part of its cash flow to cover its debts, limit its ability to plan, make changes and react quickly to changes in its segment of operation, and curtail its ability to borrow additional funds. I. Compliance with financial and other covenants – Current and future credit agreements that include financial covenant may negatively impact on the ability to finance future activity, perform business activity and may require early repayment of loans in significant amounts and make it difficult or prevent the receipt of additional financing. Delek USA is from time to time on the verge of non-compliance with these financial covenants. Compliance with financial covenants is dependant, inter alia, on factors such as the level of leverage, profitability, relevant market conditions and more, such that deterioration in various parameters may negatively impact on Delek USA’s ability to comply with financial covenant or to correct matters if necessary, due among other reasons to the current crisis in the credit market and the general downturn of market conditions. Furthermore, under the credit agreements various stipulations and restrictions apply to the Company, and these may negatively impact on the Company’s ability to perform different activities such as payment of dividends, sale of assets, entry into new activities, investments, etc. J. Difficulty obtaining financing – The current crisis negatively and significantly impacted financial institutions and limited access to financing for many companies. MAPCO has, inter alia, credit facilities and loans in significant amounts, which are valid through 2011 or even earlier should it fail to comply with the financial covenants. Given the crisis, it may be difficult to extend the credit facility and loans or to secure alternative financing at terms that are good for MAPCO, if at all, in a manner that may have a materially negative impact on MAPCO. K. Economic slowdown – MAPCO is affected by a slowdown in the American economy which is expressed in a decline in the sales volume of fuel and fuel products and the retail products sold in its convenience stores. The current economic slowdown has had a negative effect on MAPCO’s business as reflected in the decline in total fuel sales and sales at convenience stores in 2009. Some of the factors influencing consumption are general economic conditions, unemployment, consumer debt, impairment of net value based on sharp declines in the markets, real estate values, mortgage markets, taxation, energy prices, interest rates, consumer belief and other macro-economic factors. In a period of economic uncertainty, consumers are likely to cut back on travel, their level of consumption, etc. L. The following table summarizes these risk factors by type (macro risks, sectoral risks, and risks specific to Mapco), graded according to the assessments of MAPCO’s management according to their impact on conditions relating to Mapco’s operations – major, moderate or minor impact:

Degree of risk factor’s impact on Mapco's business Major impact Moderate impact Minor impact Macro risks Economic slowdown Sectoral risks • Exposure to • Competition • Competition from fluctuations in oil prices • Erosion of margins hypermarket chains and irregular delivery • Decline in cigarette • Competition consumption • Erosion of margins • Environmental protection Risks specific to • Compliance with • Credit restrictions • Dependence on supplier of MAPCO financial and other retail products covenants • • Difficulty in securing financing

The degree of the impact of the risk factors on MAPCO's business is based solely on estimates, and the actual impact may be different.

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1.8 Fuel Products Segment in Israel

The Company’s operations in the fuel products segment in Israel are conducted through Delek, The Israeli Fuel Company, Ltd, and partnerships under its ownership (Delek Israel and its subsidiaries are hereinafter referred to as “Delek Israel”). In August 2007, under a prospectus dated August 5, 2007, Delek Israel completed an IPO of shares, options exercisable for Delek shares, and debentures for total proceeds of NIS 940 million (gross). Delek Petroleum's profit from the issue of Delek Israel shares was NIS 75 million. Furthermore, under a shelf prospectus dated May 29, 2009 and shelf tender offer dated June 16, 2009, the Company issued debentures to the public for total proceeds of NIS 814 million (gross). At the reporting date, the Group holds, through Delek Petroleum, 77.37% of Delek Israel shares. Delek Israel is active in the fuel products sector in Israel, including the marketing and distribution of fuel products and oils (at public gas stations and by direct marketing to customers not by means of the public gas stations), initiating the setting up and operation of gas stations and convenience stores, as well as the storage and dispensing of fuel. In addition, Delek Israel holds approximately 3.3% of the shares in Delek Hungary Ltd., which holds 73.4% of the shares in Delek USA. Delek Israel also holds 20% of the shares in Delek Europe. Following is a diagram of the main structure of the holdings of the Group in the Israeli fuel products segment as at reporting date: ∗

* The rest of the shares are held by Delek Real Estate. Delek Israel signed a contract with Delek Real Estate to acquire Delek Real Estate's holding in said company for an amount of NIS 4.6 million. As at reporting date, said transaction is yet to be completed.

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Delek Petroleum Ltd.

77.37%

Delek, the Israel Fuel Company Ltd.

100% 51 %% Delek Lubricants – Delekol Ltd. Talus Ltd.

60% Delek Sealant (Bitum) Ltd.

51% Delek Heating Ltd.

100% Delek Conveying Ltd.

100% Delek Retail Registered Partnership

100% Delek Menta Roadway Retail Stores Ltd.

75% Consolidated Fuel Export Company Ltd.

75% Tanker Services Ltd.

100% Delek-Pi Glilot Limited Partnership

15.3% Pi Glilot Oil Terminals and Pipe Lines Ltd.

50% Delek Retail Lots Ltd.**

3.33% . Delek Hungary Ltd. 20% Delek Europe Holdings Ltd.

Details relating to the investment in Delek Israel's equity during the two years prior to the date of the report: Capital % of issued investment in NIS Date Type of transaction capital thousands July 6, 2008 Private placement 1.06% 20,000

To the best of Delek Israel’s knowledge, in the past two years no material transactions were made in Delek Israel shares by interested parties in Delek Israel outside the stock exchange, except for the following: On December 15, 2008 Delek Petroleum sold 250,000 ordinary NIS 1 par value shares, which at the date of sale constituted 2.26% of the issued and paid-up share capital of Delek Israel, for NIS 29.5 million. On June 15, 2009, Delek Petroleum sold, under several transactions, 720,000 of Delek Israel's shares which constituted at the time of the sale 6.51% of Delek Israel's issued and paid up share capital, to entities defined according to TASE guidelines as public holdings, for proceeds of NIS 95 million. Delek Petroleum's profit from said sale amounterd to NIS 31 million (pretax). For additional

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information see the Company's immediate report of June 15, 2009 (Ref. No. 2009-01-142713), the information appearing therein is indicated herein by way of reference. 1.8.1 General information about the segment of operation A. Structure of the segment Annual consumption of gasoline, diesel oil and kerosene fuels in Israel in 2009 and 2008 was approximately 6.7 tons (8.2 million kiloliters ("kl")) and 7.1 million tons (8.8 kl), respectively.1 The geographical breakdown of the consumption is: central region (Netanya to Kiryat Gat) – approximately 55%, south (south of Kiryat Gat) 10% and north (north of Netanya) 35%. The source of all the fuel is from the refineries in Ashdod and Haifa and from imports. In the fuel sector in Israel there are infrastructure companies and four main fuel companies: Paz, Delek Israel, Sonol and Dor-Alon. The infrastructure companies provide infrastructure services such as unloading, storage, dispensing and piping of fuel. The major fuel companies own about 921 public gas stations in Israel and they engage in direct marketing of fuel and oil products to consumers outside the gas stations (“Direct Marketing”). In its Direct Marketing activity, Delek Israel markets fuel products and additional products directly to the end user, not through the public gas stations. Most of the contractual arrangements with customers in the domain of Direct Marketing of fuel products are short-term (usually one-year agreements). In addition, there are other fuel companies that together own about 125 public gas stations and are involved in the other Direct Marketing activities. Delek Israel’s activity includes the marketing of fuel and oil products to gas stations, the operation of gas stations, Direct Marketing, and the operation of convenience stores that sell various products in the gas station compounds. Delek Israel also operates an electronic identification filling system (“Dalkan”) designed for fleets. In some of the compounds Delek Israel leases out areas for commercial purposes to third parties (“Retail Areas”). Delek Israel also provides storage and dispensing services for fuel products from the three terminals purchased from Pi Glilot in July 2007, located in Ashdod, Beer Sheva and Jerusalem. At the end of 2009, Delek Israel marketed fuel products to 244 public gas stations, including 132 in which convenience stores operate and 10 in which there are Retail Areas. At the end of 2008, Delek Israel marketed fuel products to 233 public gas stations, including 115 in which convenience stores operate and 28 in which there are Retail Areas. At December 31, 2009, out of the total number of 177 gas stations (compared with 149 stations in 2008) to which Delek Israel markets its products, 21 stations are operated by other companies on behalf of and for Delek Israel (compared with 26 in 2008) and 46 stations are operated by others not on behalf of Delek lsrael (compared with 58 in 2008). Furthermore, as at the reporting date, Delek Israel has engaged in 60 agreement to initiate, plan and establish gas stations. Following is a description of the structure of the fuel sector in Israel, including reference to the importation of crude oil and fuel products, their transportation, storage, dispensing and their trucking to the gas stations. Importation, purchase, transportation and storage of fuel products Fuel companies can import crude oil and crude oil products to Israel. In practice, at the reporting date, crude oil is imported to Israel by the oil refineries, which then refine them into products. Until the privatization of Oil Refineries Ltd. ("ORL"), selling prices of oil products (distillates) sold to the fuel companies by the refineries were controlled. After the privatization of ORL and the splitting up of the oil refineries, ex-ORL price control was removed except for Bituman prices (various types of tar). Delek Israel does not import crude oil,2 but in 1999 it began to import fuel products (mainly gasoline and diesel oil). Delek Israel’s decision to import fuel products is affected by the economic viability of importing (the import price versus the price at the refinery gate). The quantity imported in 2008 and 2009 was very small (negligible amounts only) due to the Delek Israel's agreement with ORL for the purchase of fuel products in recent years, an agreement which set a very attractive fuel price. Since

1 The information is taken from data furnished by the Ministry of National Infrastructures. It includes aviation kerosene and diesel oil for the Israel Electric Corporation. 2 Delek Israel maintains an emergency stock of fuel oil, diesel and jet fuel reserves on behalf of the State, pursuant to the provisions of the State Economy Arrangements (Amendments to legislation for attaining the objectives of the 2001 budget) (Holding reserves and security reserves of fuel) Regulations, 5761-2001. For additional details, see section 1.8.19.A.

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Delek Israel has entered into an agreement with ORL for the purchase of most of the fuels in 2010 and since the import prices at the reporting date are not financially viable compared to ORL's price in that agreement, Delek Israel is unlikely to import fuel in 2010. It should be noted that in the past, it has not been financially expedient to import fuel products via the Haifa Port, due to the high pier fees the port charges for unloading fuel. Nonetheless, according to the decision of the joint price committee of the Ministries of Finance and Transport, the pier fees for import and export of oil distillates and crude oil were reduced and a fixed price was set instead of a percentage of the value of the imported goods as was customary in the past. The pier fees will be updated once a year by a CPI linkage mechanism with a 2.5% efficiency coefficient. The new pier fees will apply at all the terminals used for importing fuel. Imported fuel products (as opposed to crude oil) are currently offloaded primarily at the Haifa and Ashkelon Ports by Oil and Energy Infrastructures1 ("OEI") and Eilat Ashkelon Pipeline Company2 ("EAPC"), and at the Israel Electric Corporation dock in Ashdod. Oil products are stored in terminals of infrastructure companies and at the facilities of the major fuel companies (Paz, Delek Israel and Sonol). The terminals / facilities are operated by their owners. The infrastructure companies that provide storage and dispensing services are: (1) OEI, which owns storage facilities throughout Israel and a storage and dispensing facility near Beer Sheva; (2) EAPC, which has a storage and dispensing facility in Ashkelon; (3) Ashdod Oil Refinery (AOR), which has storage and dispensing facilities in the oil refinery compound in Ashdod; (4) ORL, which has a storage and dispensing facility in the oil refinery compound in Haifa; and (5) Delek Israel, which owns storage and dispensing facilities in Ashdod, Beer Sheva, Jerusalem and Haifa.3 Fuel products are transported to the storage and dispensing terminals along a pipeline owned by Fuel Products Line Ltd.4 (“FPL”). The pipeline that carries the oil products to Delek Israel's storage and dispensing terminals in Haifa is usually the one owned by ORL. The rates for infrastructure services (unloading, storage and transporting) of oil products were set in the Commodity and Service Price Control (Infrastructure rates in the fuel economy) Order, 1995 (“the Infrastructure Price Control Order”). Transportation, issue and trucking Oil products manufactured at the oil refineries in Haifa or Ashdod and imported oil products are transported through a national distillate pipeline, which is primarily owned by FPL, to the various storage facilities. The transportation of oil products to a number of major consumers in the Haifa area (such as the Israel Electric Corporation ("IEC") and Petrochemical Industries Ltd.) is by means of the pipelines owned by ORL and IEC. The fuel products are dispensed at the dispensing sites to road tankers or directly to the end facilities of institutional customers. The choice of a storage site and the method of transporting the oil products is made from time to time by the fuel companies, based on their business considerations. Oil products are carried from the dispensing sites by road tankers, some of which carry only “white” products (gasoline, diesel oil and kerosene), some only fuel oil and some only bitumen. At the reporting date, more than 90% of transportation of the distillates sold by Delek Israel are by Delek Transportation Ltd. (formerly Shal-Del Fuel Transportation Services Ltd.) (“Delek Transportation”), a wholly owned subsidiary of Delek Israel. Additional transportation of fuels (about 10%) is by subcontractors hired by Delek Israel or by customers which transport the fuels using their own fleet of tankers or by parties acting on their behalf.5 Marketing of oil products At the reporting date, there are more than 45 fuel companies registered with the Fuel Administration and licensed to purchase oil products directly from the refineries. Delek Israel estimates that additional entities operate in this market (companies, agents, distributors,

1 A company wholly owned by the State of Israel 2 A company owned by the State of Israel (50%) and a third party. 3 It is noted that most of the storage and issue services of Ashdod Refineries are primarily for their own use, since most of the distillates it manufactures are used by Paz and the Palestinian Authority. Furthermore, to the best of Delek Israel's knowledge, at the date of the report, EAPC is building additional storage facilities in order to increase its storage and dispensing capacity. 4 A company wholly owned by OEI, which in turn is wholly owned by the State of Israel. 5 Some of the agreements with third parties grant them the right to carry the fuel products they purchase.

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wholesale customers), purchasing oil products from the licensed fuel companies and selling them to customers. B. Material changes in the segment 1. Privatization of ORL – Pursuant to the decision of the Ministerial Committee on Privatization on December 26, 2004 ("the Ministerial Committee's Decision”), Oil Refineries Ltd. ("ORL”) was split into two (one in Ashdod, one in Haifa) and then sold by the State. The oil refinery in Ashdod was acquired on September 28, 2006 by Paz, while the controlling stake in ORL was sold on February 19, 2007 to a company owned by the Ofer-Federman Group. The Ministerial Committee's Decision provided that the Commodity and Service Price Control (Maximum ex-works prices for ORL oil products) Order, 5753-1992, would be amended so that after the split of ORL and the privatization of Oil Refineries Ashdod ("ORA"), control of ex-works prices of oil distillates at the refineries will be removed, except for on the prices of oil products of which more than 50% of consumption in the local market is sold by one of the two refineries while less than 15% of consumption in the local is sold by the other refinery. At the reporting date, the following products are still under price control: low-sulfur diesel for transport, LPG, bitumen and fuel oil. The splitting and privatization of ORL together with the acquisition of the Pi Glilot facilities as described below improved the commercial terms with the refineries. 2. Pi Glilot Tender (storage and supply activities) – In June 2005 an agreement was signed between the Government of Israel, fuel companies Paz, Sonol and Delek Israel fuel companies (together: “the Fuel Companies”) and Pi Glilot Oil Terminals and Pipelines Ltd. (“Pi Glilot”), for the dissolution of Pi Glilot. Under the agreement, Pi Glilot would sell its existing operation (storage and supply of fuel products) by way of a tender, in which companies that own refining operations in Israel would be barred from bidding. On June 5, 2007, Delek Israel was selected as a “preferred bidder” for the acquisition of the three Pi Glilot terminals offered in the sale proceeding (Ashdod, Jerusalem and Beer Sheva) as a single unit, based on its bid of NIS 800 million in the sale proceeding. On July 31, 2007, the deal was closed and Delek Israel acquired the three Pi Glilot terminals for approximately NIS 806 million, after the provisions of the sales procedure were upheld and approval from the antitrust commissioner was obtained. At the reporting date, the acquisition of the Pi Glilot fuel facilities together with the privatization of ORL has led to an improvement in Delek Israel’s commercial terms with the oil refineries. 3. Increased competition – The increased competition in the marketing of fuel products to the end customers is manifested in an ongoing increase in the number of gas stations and convenience stores, in the grant of discounts on fuel prices at the gas stations, in competition over customer credit terms, in the level of discounts for fleets and in the improvement of the quality of service, which necessitates investments in improving the infrastructures and appearance of the gas stations. In addition, the increasing competition in the area of Direct Marketing is manifested mainly in lower marketing margins. Furthermore, the structural changes described in Sections 1.9.1B and 1.9.1B have increased competition in the area of fuel storage and supply, which is affected mainly by the location of the storage facilities of each of the companies that operate in this area and by the costs involved in transporting the fuel to the end user. 4. Changes in the area of fuel supply – Between 2001 and 2003 material changes occurred in the fuel supply area. Commencing 2001, ORL (at the Haifa refinery and the Ashdod refinery) began to provide fuel supply services directly from its facilities, and in 2002 it began supplying fuel at the OEI facility, which is located in the south of Israel. In 2003 the Pi Glilot facility in Herzliya shut down and Delek Israel began to supply fuel from the Pi Glilot facility in Ashdod, from the EAPC and OEI facilities in Ashkelon and the ORA facility in Ashdod. 5. Regulatory developments in the fuel sector – In recent years regulatory changes have been made related to the State’s policy on the control of the purchase of fuel products by the Fuel Companies after the privatization of ORL; the policy for control of sales prices of fuel products to consumers (at present the prices of 95 octane (unleaded) gasoline are controlled); the gradual conversion of some of the gas pumps at the gas stations to self- service pumps; and the passing of Amendment 4 to NOP 18, which will enable the setting up of “miniature” gas stations in cities, expedited approval processes, and planning reliefs. In addition, environmental protection requirements have become more stringent. C. Restrictions, legislation and standardization

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The operations of the fuel companies are subject to various legislative and regulation limitations. For details see sections 1.8.18 and 1.8.19. D. Changes in the volume and profitability of activity in the segment Commencing 2004, there was a consistent rise in the global price of crude oil which peaked in July 2008 when this trend was halted, and since then the prices have dropped sharply by approximately 70% compared with the peak price. At the reporting date, the global crude oil is traded between USD 75 – USD 80 per barrel compared with the record price in 2008 of USD 150 per barrel). This has led to a decline in the profitability of Delek Israel due to the impairment in value of Delek Israel's fuel product inventories and erosion of profits, which adversely affects its gross profitability. As a result of the decline, Delek Israel recorded inventory losses of approximately NIS 60 million in 2008, compared with a profit of a few million shekel in 2009. On the other hand, when global crude oil prices rise, Delek Israel's profitability improves as a result of the realization of its inventory of fuel products and in fact profits in the market have begun to increase indirectly. An decrease in fuel prices has led to a significant decrease of about 32% in the volume of customer credit and to a decrease in working capital needs as at the end of 2008. The rise in fuel prices during 2009 compared with fuel prices at the beginning of 2009 caused an increase of 20% in the volume of customer credit and an increase in working capital needs. The graph below illustrates the volatility of global crude oil prices from January 2006 to shortly prior to publication of this report (Brent crude oil in USD per barrel):

Development of the Brent barrel price (gross)

$ 160

$ 140

$ 120

$ 100

$ 80

$ 60

$ 40

$ 20

$ 0 1/06 4/06 7/06 1/07 4/07 7/07 1/08 4/08 7/08 1/09 10/06 10/07 10/08

Changes in Israel's policy on increasing the emergency stocks could impact positively on the scope of storage operations in fuel storage and supply, since the increase in emergency stocks will lead to a demand for storage services, assuming that the storage fees will be economically viable for Delek Israel. Furthermore, should the State decide to obligate the fuel companies to hold civilian supplies, this too could be a positive factor for the fuel storage and supply segment. E. Developments in markets and customer characteristics Delek Israel’s activity is affected by various developments in markets, inter alia, economic developments in the Israeli and global fuel prices. Below are significant developments in these markets and in customer characteristics: Development of fuel stations into Retail Areas – Recent years have seen a growing trend by fuel companies, including Delek Israel, to develop and expand their fuel stations into Retail Areas that offer, in addition to fuel products and lubricants, a range of services such as convenience stores, restaurants and cafes, cash wash services and more. Expanding self-service – In a gradual process that ended in April 2006, the fuel companies were required to install self-service gas pumps in their public gas stations. The selling price of gasoline products is lower at the self-service pumps, and no service fee is collected. In

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addition, in the wake of self-service there has been a drop in the sales of “island products”1 in the pump compounds. On the other hand, the cost of employing gas station attendants has dropped, and the transition to self-service is also in line with the trend to expand the use of the convenience stores. The introduction of self-service at Delek Israel’s gas stations has not adversely affected Delek Israel’s results, and Delek Israel estimates that over the long term also, the transition to self-service will not adversely impact its results, since it intends to set up more Menta stores at its gas stations, which could increase its revenues from these stores. Delek Israel’s estimation regarding the effect of self-service on its results in the long term is forward-looking information based on Delek Israel’s experience to date. This information might not materialize, inter alia due to the failure to set up convenience stores at the pace anticipated by Delek Israel and in the event that the drop in revenues in the wake of the self- service is greater than the reduction in gas station attendant costs and the incremental income that will stem from the convenience stores. See also Section 1.8.19B. Increase in the number of fleet customers – in recent years there has been an increase in the number of fleet customers that enter into agreements with fuel companies for the supply of oil products. The number of fleet customers – and their proportion out of the total number of customers in Delek Israel’s public gas stations - has grown in recent years. The marketing and sale of oil products for fleets is carried out through the Dalkan system, which enables computerized filling and payment on credit. The competition between the four major fuel companies (Paz, Delek Israel, Sonol and Dor Alon) has led to increased discounts for fleet customers. Due to the global economic crisis that began to impact the Israeli economy at the end of 2008, fleet sizes began to decrease towards the end of 2008 and beginning of 2009, resulting in a decline in fuel sales to existing fleets. In 2009 this trend was halted and and increase was recorded in the number of vehicles at the end of the reported year. In 2009 Delek Israel signed up new fleets, which offsets the decline at the beginning of the year in existing fleets. The decrease in fleet sizes could adversely affect the business results of Delek Israel. Nonetheless, it is emphasized that at the publication of this report, no significant decline is discernable in sales to fleets, and Delek Israel cannot assess the extent of the impact of the economic slowdown on the future sales of Delek Israel. F. Key success factors in this field and the changes in them: Delek Israel estimates that the key success factors in the segment are: 1. Nationwide deployment of fuel stations 2. Financial strength enabling Delek Israel to invest in the construction of new gas stations under company ownership, to refurbish and expand existing stations, and to purchase or set up storage and supply facilities and invest in the existing facilities. 3. Ability to raise capital from banking and non-banking sources 4. Setting up a chain of convenience stores and Retail Areas. 5. The ability to provide credit to customers, including credit to fleets that fill up using the Dalkan electronic identification system. 6. Proprietary rights in properties on which gas stations are built. 7. The terms of agreements with the station operators. 8. Attractive terms of agreements with fuel suppliers. 9. The availability of fuels, raw materials and products and the ability to store them. 10. Competitive prices offered in the tenders of major institutional clients. 11. State-of-the-art marketing and logistic systems. 12. A developed control and collection system. 13. Significant branding of Delek Israel’s products compared to its competitors. 14. Equipment and professionalism of the services provided by Delek Israel to its fleet customers 15. Collaboration with retail chains to exploit joint logistics platforms and for better purchasing terms, for example Israel Postal Services, ACE, Auto Depot and customer clubs.

1 Products found on the gas pump islands, such as mineral water, children's toys, oils, etc.

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16. Diverse marketing and distribution channels throughout Israel, including an independent marketing system and independent agents 17. In the Direct Marketing branded products (such as lubricants, sealants and insulation products), the significant success factors are reputation, know-how and professionalism, quality control systems and human capital 18. The geographical location of the storage and supply facilities in places where the oil product pipeline is located 19. Obtaining the required statutory permits for the foregoing operations. G. Changes in the supplier and raw materials array for the segment of operation There are two oil refineries in Israel – one in Haifa and the other in Ashdod, which until ORL’s privatization were owned by the State. Since the privatization of ORL, Delek Israel has two potential local suppliers of petroleum products (ORL and ORA) At the same time, it should be noted that due to the fact that ORA provides fuels mainly for its own use, Delek Israel's primary potential fuel supplier is ORL. For further details see Section 1.8.13B. H. Main entry and exit barriers in the fuel sector The main entry barriers in the segment of operation: 1. Financial strength, due to the high costs involved in locating and setting up gas stations, which are affected by high standards required for construction of the stations themselves or the installations and for the purchase and development of the know-how necessary to enter the field of direct marketing or for the construction of storage and supply facilities. 2. The long period required to obtain a license for the construction and operation of gas stations. 3. Existing regulatory restrictions in the segment including legislation and regulation relating to planning, construction and the environment. 4. The competition with other old-established fuel companies in every area of operation. 5. The need for substantial credit resources for financing the purchase of oil products, granting credit to the station operators and fleet customers. The main entry barrier to fuel storage and supply is ownership of storage facilities located in a geographical location where the oil product pipeline is located. The main exit barriers in the filling and commercial compounds is the rental/lease/operating agreements with land/station owners. The main exit barriers in the storage and supply area are the material investment made in facilities and the commitments and limitations that Delek Israel assumed as part of its acquisition of the terminals (see Section 1.8.20G). I. Substitutes for existing products and the changes in them In 2003, the Israeli Government approved Amendment No.3 to National Outline Plan No. 18, which permits the use of LPG for the fueling of vehicles in gas stations (“Automotive LPG”). In addition, in recent years hybrid vehicles with a combined gasoline and electric motor have been introduced, and the result is that less gasoline is consumed. Delek Israel estimates that at the reporting date, the number of vehicles in Israel suited for automotive LPG or the number of hybrid vehicles, is negligible. Elements in the auto industry and other entities have recently been involved in the development of cars that will run only on electricity. In this regard, it is noted that the company, Better Place, is currently establishing electric car charging points as infrastructure for selling vehicles that run on electric engines powered by batteries, which are charged while travelling and at charging points, as aforesaid. Delek Israel sees the development of alternative vehicles to those powered by fuel as a threat to the sale of fuel at filling stations. Notwithstanding, Delek Israel is unable to assess the scope of the impact, if at all, this may have on Delek Israel's sale of fuel at filling stations and on its profitability from such sales. J. Structure of the competition and the changes in it There are four large competitors in this market: Paz, Delek Israel, Sonol and Dor Alon. Paz holds 26% of the country’s gas stations, Delek Israel holds 23%, Sonol holds 21% and Dor

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Alon holds 18% of all gas stations.1 In the opinion of Delek Israel, each of its three competitors has a nationwide chain of gas stations and the capability for providing fleet services. In addition, there are numerous smaller companies that together operate, at the reporting date, about 12% of the gas stations in Israel. The competition for private consumers is mainly reflected in prices, the range of services and the sale of related products at the gas stations. The competition for fleet customers is expressed in prices, credit terms and the provision of value-added services (such as fuel consumption analysis reports, car wash services, etc.). The competition between the fuel companies is reflected by the renewal of existing contracts with gas stations owners and also the competition for the locations of new gas stations, as the demand for gas stations in specific potentially lucrative locations leads to higher rents or higher purchase prices payable to the owners of the land, which erodes the profitability of the fuel companies. The competition in the direct marketing segment is also intense, and is reflected in discounts, favorable customer credit terms and competition for the quality of service provided. The competition in this area is among all the fuel companies, large and small alike. Infrastructure companies and the three major fuel companies (Delek Israel, Paz and Sonol) operate in the fuel storage and supply sector. The geographical locations of the storage and supply facilities of each of these companies is different. Competition in this area is affected mainly by the location of the facilities, by the costs involved in transporting the fuel to the end consumer, and by the price for fuel storage and supply services, which is partly controlled. 1.8.2 Products and services The products marketed by Delek Israel and the services it provides in this segment of operation are mainly the following: A. Fuel products and other services 1. Distillates (“White Products”) Various types of gasoline – used as fuel in vehicles with a gasoline engine, and sold mainly at gas stations Diesel fuel – used mainly as fuel in vehicles with diesel engines, as well as for heating and industry Kerosene – used mainly for heating in industry and in the home Jet fuel – used for refueling aircraft 2. Residues (“Black Products”) Fuel oil – used mainly as a fuel for industry, ships and the production of electricity Bitumen (tar) – used mainly as a raw material in the manufacture of asphalt and as a sealant, and sold mainly to earthworks contractors 3. Industrial Products Delek Israel sells oils and byproducts for automobiles and for industry from its own production and from imports. These oils and byproducts are sold to industrial factories, gas stations that market Delek Israel’s oil products, garages, shopping organizations and others. Delek Israel also sells insulation and sealing products for buildings and infrastructure. 4. Services for ships Delek Israel provides services for ships anchored in Haifa and Ashdod ports, including port, electricity and cash withdrawal services, as well as referrals to local offices and payment of fees, etc. B. Retail products In its Menta convenience stores, most of which are open 24/7, Delek Israel sells a selection of retail products such as food products (sandwiches, baked goods, snacks, etc.), beverages,

1 These data are taken from the websites of the major fuel companies as at the reporting date.

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cigarettes and other products. Delek Israel, together with Israel Postal Services, recently established service points at some 10 Delek Israel convenience stores. Most of the basic services provided by postal agencies are carried out at these points. Delek Israel, together with Israel Postal Services, intends expanding the deployment of these service points as well as the services provided at these points. In addition, most of its gas stations sell car-related accessories and foodstuffs. At December 31, 2009 and December 31, 2008, approximately 147 and 115 Menta stores, respectively, operate at Delek Israel’s gas stations. As at publication date, Delek Israel operates 10 convenience stores outside of filling station and commercial complexes; seven convenience stores operate at train stations, two at hospitals and one at an academic college in the center of the country. The majority of Menta stores are operated by Delek Israel, which plans to expand the nationwide deployment of these stores in additional gas stations. Delek Israel also plans to increase the range of products and services offered in some of the stores. Furthermore, during the latter half of 2008 Delek Israel began to operate convenience stores by means of franchisees, and currently eight stores are operated by this method. C. Supply services Delek Israel provides a supply service for various fuels from its three facilities: gasoline, diesel oil and kerosene are supplied from the Ashdod facility, while only diesel oil and kerosene are supplied from the Be'er Sheva and Jerusalem facilities. The supply service is provided to road tankers that carry the fuels to the fuel companies (including Delek Israel) or by direct piping to the customer’s premises. In 2008 and 2007 the three terminals supplied approximately 2,218,000 kl and 2,250,000 kl, respectively. Approximately 54% of the supply volume in 2009 and 52% of the supply volume in 2008 was for Delek Israel's own use. D. Storage services The storage services include operational storage for the fuel companies that receive supply services from Delek Israel (including Delek Israel itself), storage of a defense stock for the State by means of the fuel companies, commercial storage by means of renting storage tanks to Delek Israel’s customers (Israel Electric Corporation, ORA, ORL and other commercial bodies) and temporary storage (storage “in transit”) in five transit tanks at the Ashdod facility of fuel piped directly to FPL’s customers throughout Israel,. In addition, Delek Israel sells fuel additives in order for the fuels to meet the standards of the Israel Institute of Standards, and also provides a service for adding the additives to the fuel that it supplies. 1.8.3 Breakdown of revenues The table below shows the amount and proportion of Delek Israel’s income out of total Group revenues, divided into groups of products or services for which the total revenues account for at least 10% of the revenues of the Delek Group in 2009 and 2008 (net of excise taxes): 2009 2008 % of Group’s % of Group’s NIS millions revenues NIS millions revenues Fuels and oils 4,022 9.26% 5,589 12.09%

It is noted that the revenues from the sales of oils are not significant, and the profit margin from them is higher than from the sale of fuels. Delek Israel’s revenues from the sale of retail products at its convenience stores in 2009 and 2008 were not material, and the profit margin from them is higher than from the sale of fuels. Gross profit stemming from oil products in Israel in the years 2009 and 2008 amounts to approximately NIS ___ million and NIS 670 million, respectively. 1.8.4 New products In the years ahead, Delek Israel plans to increase the diversity of the products and services it offers at some of the convenience stores, subject to considerations of economic viability, the absence of demand for products, regulatory limitations, etc. 1.8.5 Customers A. Delek Israel’s customers can be classified into groups as follows:

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1. Gas station and convenience store customers, which can be divided into two main groups: A) Gas station and convenience store private customers, who buy fuel products, lubricants or retail products at the gas stations and convenience stores operated by Delek Israel. B) Corporate customers, including fleets that subscribe to the Dalkan service, tender customers (“Dalkan customers”) and gas stations associated with Delek Israel under operating contracts on behalf of Delek Israel and supply contracts for the purchase of fuel and oil products. These customers differ from the private consumers mainly in the credit terms (which are longer) that they receive and the discount given to the corporate customers. It should be noted that during the ordinary course of business, and as is customary in the fuel sector, Delek Israel grants credit to its customers at the gas and commercial compounds, for a number of purposes: (a) enterprise loans – as part of a contractual arrangement of a third party (that is not Delek Israel) with a landowner for the development and construction of a gas station by the third party or by Delek Israel, where the gas station is subsequently leased by Delek Israel, Delek Israel provides the third party (the land purchaser) with a loan for the purpose of purchasing the land. These loans are generally repaid by way of offsetting the future rent to which the gas station owner is entitled; (b) commercial loans given for the renewal of a contract – sometimes, in agreements for the renewal of a contractual arrangement with a gas station owner and as part of a rental agreement or a supply agreement, Delek Israel provides the gas station owner with a loan. These loans are repaid by way of offsetting the current rent to which the gas station owner is entitled or against current cash receipts from the borrower according to a predetermined schedule;(c) agreements for scheduling a debt of those who operate gas station on behalf of Delek Israel or independent gas station operators. Sometimes, due to cash flow or other reasons, these operators ask to convert part of their debt balance into a loan, with this loan being spread out over a number of periods which do not cumulatively exceed the remaining term of the agreement between Delek Israel and the operator. Most of the enterprise and commercial loans are backed by a charge on the land on which the gas station is located, and most of the debt scheduling loans are without collateral. The total balance of these loans at December 31, 2009, is NIS 164 million, of which NIS 11 million are in respect of enterprise loans, NIS 74 million in respect of commercial loans and NIS 79 million in respect of debt scheduling agreements. Because the maximum margin for 95 octane lead-free gasoline is a fixed amount (due to government control) which, unlike non-controlled products, is not affected by price fluctuations or excise tax, there is no built-in compensation for financing and credit risk costs at a time when customer credit increases due to rises in fuel prices and the excise tax component. 2. Customers of the Direct Marketing Sector: These include private customers, tender customers (both government companies and commercial companies), and corporate customers such as industrial plants, sea craft and transportation companies, infrastructure contractors, kibbutzim, moshavim (cooperative settlements), construction companies, quarries, etc. 3. Customers in the fuel storage and supply sector: these are private customers, including the fuel companies (including Delek Israel), ORA, ORL and governmental customers including FPL, the Ministry of Defense and Israel Electric Corporation. B. Below is a breakdown of sales in the filling and commercial compounds (including excise) in 2009-2008 by type of customer (in NIS millions and as a percentage of the total revenues in the segment of operation in that year): 2009 2008 % of total % of total of segment segment Type of customer NIS millions revenue NIS millions eevenue Corporate (incl. tenders, Dalkan and 2,756 37% 3,225 38% operating / supply stations)

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Private customers 1,947 26% 1,739 20%

1.8.6 Marketing and distribution Below is a brief description of the Delek Israel’s marketing methods: A. Marketing at gas stations Marketing to the public – Delek Israel promotes its products and services in number of ways: discounts, national or station-specific sales and by using sales promoters (for example, handing out newspapers free of charge or at discounted prices to customers buying gas for more than a certain price amount, car wash at discounted price), and advertising in the media. In addition, Delek Israel invests in the maintenance and upgrading of its gas stations and the services provided there, the refurbishing of old stations and improvement of their exteriors and is working to expand the range of services provided in the stations. Marketing of Dalkan – electronic identification system – Delek Israel employs in-house marketing staff and also hires sales promoters to recruit new Dalkan customers. In addition, Delek Israel participates in tenders published by companies with large fleets that are seeking collective arrangements for filling services. In addition, Delek Israel operates a fueling service through a network electronic card (“station owner card”), which allows small private companies to obtain credit and discounts on the purchase of fuel at gas stations in the vicinity of their business. B. Expanding deployment of gas stations, convenience stores and Retail Areas 1. Delek Israel employs an enterprise manager to identify potential locations and entities interested in partnering with the company to set up gas stations. During the forthcoming year, Delek Israel estimates that it will attain deployment of more than 170 convenience stores, i.e. to set up 30 additional stores (whether operated by the Company or through franchises). This information with regard to expanding the chain of convenience stores is forward-looking information, and it may not materialize, inter alia due to the need to obtain the approval of the holder of the rights in the gas station, difficulties in obtaining the necessary approval for establishing Retail Areas (in order to set up a Retail Area, Delek Israel is sometimes required to change the urban building plan that applies to the Retail Areas, to obtain building permits, and more), regulatory changes that might impede the construction of additional outlets, economic viability, heightened competition among convenience stores, an economic recession that would weaken sales at convenience stores, and more. 2. In 2004, Delek Israel and Delek Real Estate established Delek Retail Lots Ltd. ("Delek Retail Lots” or "DRL"), a private company owned equally by the two companies. DRL specializes in identifying and purchasing gas stations and land on which it will initiate, plan. build and operate real estate enterprises that include gas stations and commercial centers. At the reporting date, Delek Retail Lots has acquired fourteen plots of land on which it intends to operate in this manner (two already had active gas stations and commercial centers when they were acquired, four have begun operating by the reporting date and eight are in the planning stages). Delek Israel signed a contract with Delek Real Estate to acquire Delek Real Estate's holding in DRL. As at the reporting date, this transaction is yet to be concluded. C. Marketing and distribution in Direct Marketing In the Direct Marketing operation, Delek Israel has a marketing and sales system, either alone or through subsidiaries and investee partnerships, for marketing the products to the end customers. Delek Israel also has contractual arrangements with fuel agents (third parties), selling fuel to end customers, who are the agents’ customers. The transportation of oil products marketed by Delek Israel in the Direct Marketing segment is mainly through the subsidiary Delek Transportation, through various subcontractor carriers and by direct piping to the customer. Delek Israel is not dependent upon any single agent for marketing its fuel products; however, the entire marketing array is material for Delek Israel. D. Exclusive agreements Delek Israel has an exclusive representation agreement, which is not material, with International corporation Exxon Mobile for the marketing of the latter's oils in Israel. The

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agreement is effective through December 31, 2010, and can be cancelled under such terms and conditions as are acceptable in similar agreements. In addition, Delek Israel has most of the supply agreements with gas stations for the exclusive supply of fuel products during the period of the contractual arrangement. For further details about the supply contracts, see Section 1.8.10C. 1.8.7 Competition A. According to data published by the Fuel Administration, there are 45 fuel companies registered in Israel and licensed to purchase oil products from ORL. Together, the four major companies hold the largest market share in Israel. Delek Israel estimates that it is the second largest fuel marketing company in Israel, its main competitors being Paz, which markets petroleum products to 274 gas stations (about 26% of all gas stations), Sonol, which according to Delek Israel’s estimates markets to about 222 stations (21%) and Dor Alon which according to Delek Israel’s estimates markets to about 186 stations (18%). B. The Israeli fuel economy is characterized by intense competition in all the areas of operation of Delek Israel, as follows: 1. Expansion of deployment of the gas stations of the fuel companies and their locations, whether by identifying new locations and setting up new stations or through agreements with old-established gas stations whose operating/supply contracts have expired. 2. Marketing to end consumers and increasing sales in gas stations. This competition is reflected in the erosion of marketing margins, the grant of discounts and holding sales promotions, the service provided at the stations, and the range of services offered to the customer. 3. The entry of fuel companies and retail companies into retail activity on the premises of the gas stations. 4. Competition in the area of marketing to fleets, which is primarily between the major fuel companies, is manifested primarily in competition over the prices offered to the fleets and in the additional services provided by the fuel companies, such as electronic reports and media, fleet management software, car-wash services and the like. 5. The competition in Direct Marketing has become extremely aggressive, both due to the factors driving competition in the fuel sector in general and due to issues that are unique to this segment. Since the bulk of supply is carried out directly to the customer, independent of the physical location of the marketer (i.e. the gas station), and since no major financial investment in facilities is necessary, there is fierce competition among all the rival parties for each and every customer, with none of them having any comparative advantage. The competition is manifested in the price terms given to the customers. The intense competition in Direct Marketing stems, in part, from the fact that some of the oil products are generic, with limited importance as to their origin and/or quality, as well as from the low transfer costs (both for the customers and the fuel companies) and the terms of the contractual arrangements with customers, which are made in the framework of tenders or short-term engagements. 6. Competition in the area of fuel storage and supply is affected mainly by the location of the storage facilities of each of the companies (the infrastructure companies and the fuel companies), by the costs involved in transporting the fuel to the end consumer, and by the price for fuel storage and supply services, which is partly controlled. C. Below are the ways in which Delek Israel deals with competition and the factors affecting its competitive status. 1. Delek Israel is working to expand the deployment of its gas stations with which it is associated, and estimates that its nationwide deployment of stations increases their accessibility and provides it with an advantage in the competition for private customers and for Dalkan customers, to whom a wide distribution of gas stations is especially important. 2. The penetration of fuel products that are unique to Delek Israel (such as the Delek Dragon fuel, which contains additives that improve engine efficiency), while working to enhance the reputation of its products as high-quality fuel products. 3. Expansion of the marketing of additional products and services in gas stations on the basis of the existing infrastructure.

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4. Improving the appearance, atmosphere and service at its gas stations. 5. Improving the stations’ operating structure. 6. Ability to grant credit to customers, bearing in mind that credit exposure is a risk factor. 7. A developed and supervised marketing array with a high-level control ability. 8. Levels of readiness to manufacture and supply large quantities when necessary (this is relevant for the sealants and insulation products that are sold in the Direct Marketing segment). 9. In the fuel storage and supply segment, the main way in which Delek Israel copes with competition is by providing better service and more competitive prices. The differences in costs with the other infrastructure companies and the different storage capacity of each of the companies operating in this area, affect Delek Israel’s competitive status in this segment. 1.8.8 Seasonality In general, Delek Israel is not affected by seasonality. At the same time, in recent years there has been an increase in the sale of fuels at gas stations during the summer which stems, Delek Israel believes, inter alia from an increase in car travel to vacation destinations and the use of air- conditioning in cars, which increases fuel consumption. During Jewish holidays (usually 0ne or two days), fuel consumption decreases, especially in the business sector and in industry, while sales of retail products increases as compared with the rest of the week. Seasonality does not exist for most Direct Marketing products. However, sales of diesel oil and kerosene for domestic heating as well as sales to industrial customers increase during the winter i.e. in the first and fourth quarter of each calendar year. In addition, sealants and insulation products are seasonal and are applied mainly in the spring, summer and autumn, while in the winter (the second half of the fourth quarter and the first quarter), the demand for these products drops significantly, since many of these products cannot be successfully applied in winter weather conditions. The effects of seasonality on the fuel storage and supply activity is immaterial. 1.8.9 Production capacity in direct marketing The maximum potential production capacity at the plant that produces oils and auxiliary products for vehicles and industries ("the Delkol Plant"), is around 40,000 tons per year. The annual oil production capacity utilized at the plant is around 16,000 tons per year. The maximum potential production capacity at the plant that produces chemical products ("the Bitum Plant") is around 21,000 tons a year. The annual oil production capacity utilized at this plant is around 15,000 tons per year. For a description of the maximum and utilized capacity of the storage and supply facilities, see section 1.8.10H. 1.8.10 Property, plant and equipment, and facilities A. At December 31, 2009 Delek Israel owns or leases from ILA 45 gas stations (including 10 jointly owned with third parties and Delek Retail Lots) and 167 stations all over the country leased or rented under long-term agreements. Delek Israel also has fuel storage and supply depots in Ashdod, Be'er Sheva and Jerusalem, a fuel supply depot in Haifa, a fuel oil supply depot in Ashdod, a bitumen production plant and a plant for the manufacture and mixing of lubricants in Lod. Of all these gas stations, at December 31, 2009 Delek Israel operates 177 stations, 21 are operated by third parties on behalf of Delek Israel under operating agreements, and 46 are operated by third parties under supply agreements. All the gas stations are branded Delek or Gal and sell Delek Israel products exclusively. Below are Delek Israel's gas stations, classified according to porproetary rights in the land and terms of station operation, at December 31, 2009: Operated by Delek- Operated by Self operation appointed contractor Type of station (Delek Retail) operator (supply) Total Ownership and ILA lease 36 9 -- 45

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Operated by Delek- Operated by Self operation appointed contractor Type of station (Delek Retail) operator (supply) Total Disabled IDF veterans 18 1 5 24 Rent under three years 12 5 0 17 Rent above three years 111 6 8 125 No proprietary rights -- -- 33 33 (supply) Total 177 21 46 244

B. Proprietary rights in station land Delek Israel's gas stations are divided into two categories from tha aspect of ownership of the land on which the stations are located, as follows: − Stations owned by Delek Israel or leased from Israel Land Administration (ILA) include stations where the land is owned by Delek Israel or leased by primary lease from ILA, with a minority of stations jointly owned with a third party. − IDF veteran stations were established pursuant to an interministry agreement between the State of Israel and the fuel companies. This agreement stipulates that ILA land would only be allocated for establishing gas stations if the right to operate those stations is awarded to a disabled IDF veteran selected by the Rehabilitation Department of the Ministry of Defense for his rehabilitation. This guideline was modified in the 1990s and currently ILA allocates land for gas stations directly to the fuel companies, and not under the disabled IDF veteran rehabilitation agreement. Under the aforementioned agreement, the disabled IDF veteran is granted primary leasing rights for 49 years, with an option for extension for a further 49 years. Concurrently, the fuel companies are granted secondary leasing rights for the same term in return for leasing fees equal to the leasing fees paid by the veteran to ILA. Delek Israel would lease the land for establishing the gas station, install the equipment needed for its operation and maintain its systems. After establishing the station, Delek Israel appoints the veteran as operator on its behalf, so that they are required to purchase all oil products exclusively from Delek Israel, and the prices for the oil products to the station (i.e. the sale prices to the veteran) is set by Delek Israel. Under the agreements, in some cases the veterans have undertaken to pledge the station land to Delek Israel in order to secure their obligations, but in most cases this pledge has yet to be registered and only the contractual obligation exists. In this context it should be noted that according to the new Ministry of Defense guidelines pertaining to gas stations and the rehabilitation of disabled veterans, approval must be obtained from the Rehabilitation Department of the Ministry of Defense for any transfer of operating rights for these gas stations to a third party, including Delek Israel, requiring the consent and approval of the Ministry of Defense (this requirement appears, inter alia, in the gas station leasing agreement). The Ministry of Defense emphasizes that the main thrust of its policy is that the station is designated for the occupational rehabilitation of the veteran and therefore it cannot be transferred to a third party. In a letter from the Rehabilitation Department to Delek Israel, the Rehabilitation Department requests details pertaining to stations owned by veteran soldiers that have contracts with Delek Israel, and Delek Israel provided the requested information. It should be noted that if the Rehabilitation Department does not approve operation of the veteran stations by Delek Israel, the Rehabilitation Department will order the termination of the operating agreement between Delek Israel and the veteran and Delek Israel will only be permitted to supply fuel to those stations. − Rented stations include those where the company is sub-lessee or lessee from a third party which is not ILA, and stations under long-term or short-term rental. Usually Delek Israel commits to establish the station a its own expense, to install most of the equipment required for normal operation, and to maintain all its systems. In these stations, the operator is required to purchase all oil products exclusively from Delek Israel, and prices for oil products to the station operator is are set by Delek Israel. Through the end of 2010, rental rights of Delek Israel in 2 gas stations are expected to expire. However, based on past experience, Delek Israel estimates that a rental agreement will be signed for these

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stations for an additional period. although it is uncertain that such agreements will be signed or that the rent will not change when renewing those contracts. − Stations where Delek Israel has no proprietary, possession or usage rights are those where Delek Israel has signed agreements with station owners which usually grant Delek Israel exclusivity in supplying fuel products for a 1-year term, with the owner alone having the option to demand renewal of the agreement for a further 1-3 years; the remaining cases include provisions with regard to commercial terms. In many of these agreements there is no guarantee for fuel product supply. The supply agreements for these stations will end by end of 2012. Nevertheless, in view of past experience and relationships with the owners of these stations, Delek Israel estimates that in most of these stations, supply will continue after expiration of the supply agreement. This estimate by Delek Israel is forward-looking information which may not materialize, inter alia, if the supply agreements are not renewed or if margins are not be changed upon their renewal. If the agreements are not renewed, Delek Israel estimates foresees no material negative impact on Delek Israel's business. For details of restrictions in restrictive trade practices legislation applicable to Delek Israel's engagements with the owners of rights in gas stations, see section 1.8.19J. C. Gas stations are operated in one of several ways: − By Delek Israel through Shaarey Delek Retail Partnership (“Delek Retail”), and through Delek Menta Road Retailing Ltd. (“Delek Menta”). − By a third party appointed by Delek Israel – Gas stations in this arrangement carry Delek Israel signage and purchase all products exclusively from Delek Israel. The operator is obliged to operate the station in accordance with Delek Israel procedures which include, inter alia, criteria for opening hours, uniform outward appearance, maintenance standards and quality of service. In most cases the operator bears most of the operating cost of the gas station, including for hiring staff and purchasing inventory from Delek Israel. In some cases Delek Israel contributes to operating costs (property tax, station maintenance, payment of lease fees where the station is leased, participation in discounts for customers with filling cards), In other cases Delek Israel does not participate in the operators' costs but gives a discount on the prices of the fuels sold to them. The operator is responsible for obtaining the licenses and permits required for operating the station, but in some cases Delek Israel processes and pays for compliance with regulatory requirements applicable to the gas station. The operator pays Delek Israel fixed and/or variable rent, based on sales volume at the station. − By an independent third party not appointed by Delek Israel – In these stations there are in effect short-term supply agreements of a year, where only the operator has the option to request renewal of the agreement for an additional year, up to three times. The supply agreements require operators to purchase fuel and lubricant products from Delek Israel at agreed prices and credit terms, and to sell them under Delek Israel trademarks, under their name and within price control restrictions, and in accordance with the stipulations of Delek Israel with regard to safety procedures, marketing, the outward appearance of the gas station etc. Usually Delek Israel owns the gas station equipment and lends it to the station operator. Delek Israel installs the equipment required for operation of the station and provides the owner of the rights with maintenance services and professional pursuant to the contractual agreement. In most cases there are no guarantees for selling fuel to stations. In some cases Delek Israel has no exclusivity in supplying fuel products. D. All Menta convenience stores are operated by Delek Israel through Delek Menta and Delek Retail ("the Operating Companies”), with the exception of 8 stores operated under franchisees. All Menta store employees are hired by the Operating Companies, which also purchase stock and bear the risk involved in operating the convenience stores. During 2008, Delek Israel began to operate convenience stores through franchisees who run the stores with their own employees. The franchisees purchase the inventories and bear all the risk involved in operating the stores. Delek Israel will decide in each case, based on business considerations, whether to operate the convenience store through franchisees. E. Delek Israel’s property, plant and equipment in the gas station and convenience store segment include buildings and equipment in most of the public gas stations in which it has proprietary rights. In addition, it has equipment installed in all the stations in which it has no

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proprietary rights or for which it has short-term lease agreements. In some of these stations, Delek Israel also has property, plant and equipment in station buildings constructed many years ago, when it had ownership rights (including long-term lease contracts) in those stations. Delek Israel’s equipment in its stations includes everything needed for operating the stations including tanks, pipes, pumps, computer and communication systems, office equipment, electrical systems and generators, fire extinguishers and public toilets. Delek Israel also has vehicles and trucks for the transportation of fuel and oil products. F. Delek Israel's property, plant and equipment in the direct marketing segment includes the equipment in the inner stations, including infrastructure, tanks, pipelines, pumps and designated tanks on customer premises. In addition, Delek Israel has a fuel supply depot in Ashdod, which it leases from Ashdod Port Ltd. ("Ashdod Port") through June 15, 2010.1 Delek Israel is considering whether to continue leasing the depot. Ashdod Port is considering publishing a tender for leasing and operating the supply depot. At the reporting date, no such tender has been published. In addition, Delek Israel owns three barges for fueling ships in the ports of Haifa and Ashdod. Delek Israel has a 49 dunam plant in Lod, of which about 47 dunams are owned by Delek Israel and the rest is leased from ILA. The plant contains lubricant mixing facilities, filling and packing facilities, an installation for lubricant renewal, facilities for the manufacture and recycling of solvents, a central sewage treatment plant, warehouses and laboratories, as well as various buildings, a plant for the manufacture of water-based paint, and offices. G. Delek Israel has an 11 dunam plant in the Haifa Bay industrial zone, most of which is owned by the Group (Delek Israel, Delek Investments) and part is leased from the Jewish National Fund (on April 1, 2004, the lease fees were capitalized for 46 yeas). The plant consists of industrial buildings, including production plants, offices, warehouses, facilities and sheds. H. Delek Israel's property, plant and equipment in the storage and supply operation has four facilities: three in Ashdod, Be'er Sheva and Jerusalem for providing storage and supply services for Delek Israel and third parties, and the fourth in Haifa, for Delek Israel's own use. The Ashdod facility, Delek Israel's main storage and supply facility in Israel, is located in Ashdod’s northern industrial zone, on 329 dunams of land. Delek Israel is entitled to be registered at ILA as owner of leasing rights in this land through June 30, 2019, with an option for a further 49 years. The Ashdod depot has 26 above-ground tanks with a maximum capacity of 506,000 cu.m., as well as six tanks of additives and three water tanks. In practice, in 2009 100% of the total capacity of above-ground tanks was utilized. Adjacent to the tank farm is an operating area which includes an administrative building and an office building as well as technical and special-purpose buildings. The Be'er Sheva facility is located next to the Hatzerim road, on 79 dunams of land. Delek Israel is entitled to be registered at ILA as owner of leasing rights in this land through July 31, 2015,2 with an optional extension for a further 49 years. The Be'er Sheva facility has 10 above-ground tanks with maximum capacity of 72,000 cu.m., as well as two tanks of additives and three water tanks. Adjacent to the tank farm is an operating area which includes an administrative building with restrooms as well as technical and special-purpose buildings. In practice, in 2009 a total of 68,000 cu.m. out of the total capacity of the above-ground tanks was utilized at this facility. The Jerusalem facility is located on the southern slopes of the Har Nof neighborhood, on 59 dunams of land on three levels, of which FPL holds 3 dunams under a separate leasing agreement. A plan was approved conditionally for filing by the Planning and Construction Sub-committee on March 25, 2002, whereby this land will be re-zoned for residential use. The plan has not progressed due to the opposition of green organizations to the location of the alternative site designated at the time, and the plan is no longer being processed. Delek Israel is entitled to be registered at ILA as owner of leasing rights in 55 dunams of land through March 19, 2015, with an optional extension for a further 49 years. ILA announced that it intends to renew the lease from April 1, 2008 for a further 49 years, but the lease agreement has not yet been signed between ILA and Delek Israel. The Jerusalem facility has 8 above-ground tanks with a maximum capacity of 33,500 cu.m., as well as 3 tanks of additives and one water tank. The operating area includes

1 It is noted that the original deed of lease by which the depot was leased expired on June 16, 2006 and since then, as a new tender has not been published for the depot, the depot is leased by Delek Israel by means of payment on demand sent from time to time by Ashdod Port. At the same time, Ashdod Port and Delek Israel are negotiating for signing a new formal contract for the period from June 16, 2006 until actual termination of the lease. 2 Said date is according with Rights Confirmation issued by ILA. According to the leasing contract, the leasing rights are through August 20, 2015.

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two office buildings as well as technical and special-purpose buildings. In practice, in 2009 a total of 10,000 cu.m. out of the total capacity of the above-ground tanks was utilized. The Haifa facility is in the Haifa Bay area (Hof Shemen) on 31 dunams of land, and is owned by Delek Israel. The Haifa facility has 14 tanks with maximum capacity of 20,000 cu.m, 5 tanks of additives, and water tanks . In practice, Delek Israel used in 2009 approximately 12,000 cu.m. of the maximum capacity of its tanks. In addition, Delek Israel has the equipment required for a storage and supply operation. 1.8.11 Intangible Assets Delek Israel operates under several well-known, protected brands: "Delek" and "Gal" (gas station brands), "Menta" (convenience store brand), "Delkol" (oil brand) and "Dalkan Delek" (electronic filling service brand). In addition, Delek Israel markets products under various brands, such as export lubricants under the Desko and Mapco brands, and is the exclusive importer of Exxon Mobil products in Israel. Delek Israel has registered trademarks in the field of insulation products and sealants: BTI, Multigag, Mastigum, Masting and Flexiigum. Delek Israel owns a registered trademark for the company name, “Bitum”. In the Ukraine and in Eastern Europe there are registered trademarks for the Mastigum and Flexigum products. 1.8.12 Human Resources A. Delek Israel employees at December 31, 2009 and December 31, 2008: No. of employees at No. of employees on Department December 31, 2009 December 31, 2008 Management/headquarters 143 135 Production and operation 272 269 Station service 1,503 1,233 Sales and marketing 107 91 Security staff 58 59 Total 2,083 1,787

At December 31, 2009, out of the total number of employees, 1,691 are employed in the stations, 232 in direct marketing, 102 in fuel storage and supply and 58 are not assigned to any operating sector. Most of the increase in the number of employees in 2009 stems from the transition of stations to self-service operation, rapid development of Delek Israel’s chain of convenience stores, and reinforcement of the marketing array and station control; B. Most of Delek Israel's employees are hired under personal employment contracts and are not subject to a special collective agreement, while special or general collective agreements apply by virtue of membership of the companies in employers organizations or by virtue of expansion orders. Delek Israel customarily grants its employees bonuses, based on performance and subject to the approval of the board of directors. C. Delek Israel only employs road tanker drivers who are licensed to transport hazardous materials. In addition, employees who work in the gas stations or who come into contact with petroleum materials, undergo training in fire extinguishing and the prevention of environmental hazards. D. Officers and senior management employees at Delek Israel are employed under personal employment contracts which include contributions to managers insurance. On November 5, 2007, Delek Israel adopted a stock options plan for 2007, whereby Delek Israel granted, free of charge, to employees, officers and consultants up to 441,824 unlisted options, exercisable for Delek Israel ordinary shares (“the 2007 Plan”), of which 109,483 options were granted to Mr. Moshe Amit, Chairman of the Delek Israel Board of Directors, and the remainder to employees, consultants and officers of Delek Israel and/or corporations it controls. As at December 31, 2009 49,200 options expired due to the fact the termination of employment of the employees who were allocated these options and 17,700 options were exercised for shares. Subsequent to the foregoing date and as at the reporting date 4,320 options were exercised and a further 6,480 expired due to terminiation of employment of the employees to whom the options were allocated. The options will vest over a 5- year period, with the exercise price varying at each grant date. Exercise of options for shares by employees who are not senior officers will be by means of cashless exercise, whereby the employee is eligible to receive shares reflecting the benefit component inherent in the exercised options, based on a formula set out in the Plan, in consideration of payment of the par value of the shares only. Employees which are senior officers can exercise the options granted to them by cash payment of

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the exercise price or by means of the aforementioned mechanism – as they choose. The option can be exercised for shares, subject to their vesting schedule, through May 31, 2013, or prior to that date in the event of termination of employment or of provision of services, as described in the Plan. The right to exercise is subject to adjustments described in the 2007 Plan. Senior officers of Delek Israel are entitled to receive a loan for exercise of the options, at annual interest of 4% and linked (principal and interest) to the CPI known on the date of grant of the loan. The loan will be a non-recourse loan, secured only by a fixed senior lien on the underlying shares. The theoretic financial value of the total number of 374,924 options allocated to employees and which have not expired at December 31, 2009, based on the Black & Scholes model, amounts to NIS 15,821,000. This estimate is based on the following parameters: price per ordinary share at the date of the board of director's resolution concerning the allocation; exercise prices as aforesaid; annual standard deviation of 35.29%; expiry date of the options for the purpose of this calculation was calculated as an average of the purchase date of each tranche and the formal contractual expiry date; annual discount rate of 4%; rate of employee churn of 3% per year; the expected expiry date of non-recourse loans was calculated as an average between the expected contract expiry date for the options and the extension of the options by six months from the original expiry date. The table below presents additional details of Delek Israel's employee stock options plan at December 31, 2007, under the 2007 Plan: Number of shares Value of benefit in exercisable under options granted Expenses the Plan (at full under the plan recognized in 2008 dilution) (NIS in thousands) (NIS in thousands) Employees (non-officers) 114,900 4,520 975 Officers 150,541 6,496 1,344 Chairman of the Board 109,483 4,805 614 Total 374,924 15,821 2,933

On August 31, 2009, Delek Israel adopted a plan to allocate options for 2009, according to which Delek Israel awarded, free of charge, to employees of Delek Israel and/or companies under its control, 69,600 unlisted options, which are exercisable for ordinary shares of NIS 1 par value each of Delek Israel (" the 2009 Plan"). The 2009 Plan was submitted for approval of the income tax authorities as required by the provisions of the Israeli Income Tax Ordinance (New Version) -1961 ("the Ordinance"). The table below presents particulars of the 2009 Plan Number of shares Value of benefit in exercisable under options granted Expenses the Plan (at full under the plan recognized in 2009 dilution) (NIS in thousands) (NIS in thousands) Employees (non-officers) 69,600 2,876 724 Officers - - - Total 69,600 2,876 724

For a description of the terms of employment of Mr. David Kaminitz, currently serving as CEO of Delek Israel as of June 1, 2009, see particulars pursuant to Regulation 21 in Chapter D of the periodic report. For a description of the terms of employment of Mr. Eyal Lapidot, who served as CEO of Delek Israel until May 31, 2009, see particulars pursuant to Regulation 21 in Chapter D of the periodic report. E. For a description of the terms of employment of Mr. Moshe Amit, Chairman of Delek Israel’s Board of Directors, see particulars pursuant to Regulation 21 in Chapter D of the periodic report. 1.8.13 Raw materials and suppliers of fuel products and oils A. The main oil products used by Delek Israel The main fuel products used by Delek Israel, both in fuel marketing in public stations and in direct marketing, are oil distillates produced from crude oil purchased and traded on global exchanges. The oil distillates are purchased mainly from the Haifa and Ashdod refineries, and the rest are imported from overseas suppliers according to financial considerations. Oil

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distillate prices are exposed to fluctuations in currency exchange rates and in global commodity markets. The main raw materials used by Delek Israel in the manufacture of oils and lubricants is base oil, which is purchased from Haifa Base Oils Ltd. and from overseas suppliers, and additives that are purchased from various suppliers in Israel and abroad. In addition, Delek Israel imports oils and finished products from overseas suppliers (Exxon Mobil) to supplement its product range. The major raw materials used by Delek Israel at the plant producing insulation products and sealants are bitumen, felt and polymers. Delek Israel purchases the bitumen from refineries in Israel and the felts and polymers from several local or overseas suppliers. In 2008 and 2009 Delek Israel purchased 100% of its gasoline and diesel fuel products from ORL (primarily) and ORA (in insignificant amounts), and imported in 2008 negligible quantities of fuels. In 2007, Delek Israel purchased 35.7% and 7.6% of its fuel and diesel products from ORL and the ORA, respectively and the remaining products were imported from overseas suppliers (mainly Vitol and Glencore). Delek Israel's decision concerning the source of purchase of fuels derives purely from financial feasibility concerns. B. Agreements with major suppliers 1. Local suppliers Until the privatization of Ashdod Oil Refineries, completed in Q4 of 2006, the supplier of most of the Delek Israel's petroleum products was ORL, with purchases made in accordance with a fixed procedure. The price of fuel products purchased from ORL is determined based on product prices at Lavera, Italy, which include marine shipping cost and insurance (“CIF Lavera”). The Lavera price is set as the average price at which the product is traded in the first five days of the last working week of each month, converted into NIS using the USD exchange rate (for checks and transfers at Bank Leumi) on the fifth day. This price is set once per month for the following month, and does not change throughout the month. Actual credit extended to Delek Israel is for 30 days. Prepayment by means of a down payment entitles Delek Israel to credit interest. The remaining payments are linked to the dollar exchange rate. In 2007-2008, purchase of petroleum products from the oil refineries in Ashdod was subject to the terms of a purchase agreement between Delek Israel and Ashdod Oil Refineries Ltd. ("ORA"). Under this agreement, the purchase of petroleum products from ORA is by means of monthly orders in exchange for prices as set in the agreement and calculated using a price formula derived from the price of petroleum in the Mediterranean Basin, where ORA has the right to update the price structure at its own discretion, contingent on it furnishing advance notice of any such change, as set forth in the agreements. Most purchases of oils from ORL are made according to an annual contract between Delek Israel and ORL and the rest are purchased on the basis of spot prices. The annual contract between Delek Israel and ORL states that Delek Israel will purchase monthly quantities at a purchase price based on the annual contract. Delek Israel is dependent upon its local suppliers. Delek Israel's chief supplier in 2009 was ORL. 2. Import of oil products In the past Delek Israel imported oil products from global petroleum suppliers, in cases where the cost of imported oil products is lower than local supply. In 2008, Delek Israel imported oil products in negligible amounts from international suppliers and in 2009 Delek Israel did not import fuel products, due to the fact that ORL's fuel purchase terms were better. The import price for international trade companies is determined by a formula based on the local rate. 1.8.14 Working capital A. Raw material inventory policy – Delek Israel's policy is to maintain a stock of base oil sufficient for an average period of up to 60 days. In 2008 and 2009 Delek Israel maintained an average base oil inventory of 60 days. B. Finished product and emergency inventory policy – Delek Israel is obligated by Emergency Regulations to maintain an emergency supply of diesel and jet fuel for the State of Israel. The expenses and financing for this inventory are covered by the State.

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C. Operating inventory – Delek Israel's policy is to maintain a stock of fuel products sufficient for an average of 30 days, oils sufficient for an average of 60 days and retail products sufficient for an average of 7-45 days, depending on the type of product. In 2008 and 2009 Delek Israel maintained inventories in accordance with its policy. D. Credit policy 1. Customer credit: Delek Israel provides credit to its customers for a period ranging between EOM + 5-30 days for the purchase of gasoline and EOM + 60-90 days for the purchase of diesel fuel and fuel oil. It should be noted that the average credit extended to the Delkan customers is shorter, at EOM +45 days. Delek Israel provides customers of its storage and supply services with credit at EOM + 15 days. The average credit period to customers in 2008 and 2009 was 53 days. Average credit amounts to customers in 2009 and 2008 were NIS 1,444 million and NIS 1,480 million, respectively. The percentage of secured customer credit is not material. 2. Supplier credit: Delek Israel receives EOM +15 days credit for fuels purchased under its annual purchase contracts with ORL For purchases from ORL that are not under the contract and for purchases from ORA, Delek Israel pays on average in the middle of the month in which the fuels are purchased, and receives pre-payment interest of 30 days. Excise taxes (which are a significant amount of the cost of fuel) are paid by Delek Israel ten days after issue of the fuels, according to the law. 3. The differences between the customer credit and the supplier credit and the excise credit (Delek pays the government before it receives the money from the customer) compels Delek Israel to take short term loans to finance those differences. Delek Israel’s strategy for closing the gap is to shorten the customer credit period and to replace short-term credit with long-term credit. 1.8.15 Investments A. Delek USA - Delek Israel holds 3.33% of the share capital of Delek Hungary, which holds 73% of Delek USA. For additional details on the activities of Delek USA in oil refining, fuel products and gas stations in the USA, see sections 1.7 and 1.8 of the report. B. Delek Europe – Delek Israel holds 20% of the shares of Delek Europe Holdings Ltd. (“Delek Europe”), which holds 100% of shares of Delek Benelux B.V. (“Delek Benelux”) through a wholly-owned foreign subsidiary. For details of Delek Benelux's marketing operations in Benelux countries (Belgium, Holland and Luxembourg), see section 1.10 of the report. C. Pi Glilot – Delek Israel holds 15.3% of Pi Glilot, a mixed company as defined in the Government Companies Law, together with Paz, Sonol and Sonefco Bank Street Corporation and the State of Israel (21.5%, 13.2% and 50%, respectively). Through July 31, 2007, Pi Glilot held real estate rights in storage and supply facilities in Ashdod, Be'er Sheva and Jerusalem. Following the privatization of Pi Glilot, on July 31, 2007 Delek Israel completed acquisition of these storage and supply facilities and of the associated storage and supply operations, in consideration of NIS 806 million. Currently, Pi Glilot owns real estate rights in the 170-dunam Pi Glilot site in Ramat Hasharon, which used to include a storage and supply facility. At the reporting date, Israel Land Administration is promoting a municipal building plan under which an area including the Pi Glilot site will be developed for housing, commerce and employment purposes. In the opinion of Delek Israel, which is based on an assessor’s valuation obtained for participation in the Pi Glilot tender, if these changes in the designation of the land are completed, the property could increase in value. This is forward-looking information, based on the assessor’s valuation, the assumption that the municipal building plan will be accepted, the demand for real estate in the compound and other reasons, and might not materialize. Pursuant to a district court decision on June 11, 2002, in 2004 Pi Glilot ceased all business activity relating to the supply of oil products from the Pi Glilot site in Ramat Hasharon. Upon completion of the privatization proceedings, the Ramat Hasharon facility will be transferred to Pi Glilot shareholders and Pi Glilot will enter into voluntary liquidation, ending all operations. 1.8.16 Financing A. Below are the effective interest rates on loans from bank and non-bank sources effective in 2009 and not intended exclusively for specific use by Delek Israel: Average interest rate Short-term Long-term credit credit

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Shekel loans 3.51% 3.56% Bank sources CPI-linked loans 3.50% - Foreign-currency-denominated loans - 3.80% Shekel loans - - CPI-linked loans 5.51% - Non-bank sources Issued debentures – CPI-linked 5.55% - Issued debentures – in shekel 4.90% -

B. Financial covenants – As part of the receipt of loans and credit facilities from banks, Delek Israel has committed to maintain the following financial covenants: 1. Delek Israel is obligated to the banks not to encumber its property, plant and equipment in any form without the prior written approval of the banks (except for property, plant and equipment encumbered in favor of the entities that financed purchase of those items). 2. Delek Israel and its subsidiary undertook towards a bank to maintain an equity to balance sheet ratio of 35% in the subsidiary. At December 31, 2009, the ratio at the subsidiary was 45%. C. Credit facilities – At December 31, 2009 and as at the publication date of this report Delek Israel's bank credit facilities total NIS 1,550 million, of which it has utilized NIS 890 million and NIS ___ million, respectively. Nevertheless, it is emphasized that at December 31, 2009, Delek Israel's balances of cash and cash equivalents were NIS 389 million. D. Credit rating – Debentures (Series A) issued by Delek Israel in August 2007 were rated (A+)/Stable by Standard & Poor's Maalot. ("Maalot"). In August 2008 Midroog Ltd., ("Midroog") rated said Debentures (Series A) Aa3, accordingly. On June 15, 2009 Midroog announced a decline in the rating of Debentures (Series A) to A1 with stable outlook. On May 26, 2009 Maalot announced lowering the rating of Debentures (Series A) to A- with stable outlook. On June 14, 2009, Standard & Poor's Maalot ("Maalot") announced awarding a rating of iLA Stable for debentures in the amount of up to NIS 800 million issued by Delek Israel under a shelf tender offer of June 16, 2009. On June 15, 2009 Midroog Ltd. set a rating of A1 with stable outlook for debentures in the amount of up to NIS 800 million issued by Delek Israel under a shelf tender offer of June 16, 2009. E. Variable interest credit: Details of variable interest credit obtained by Delek Israel at December 31, 2009 and at the reporting date are as follows: Range of interest rates at Interest rate immediately Track December 31, 2009 prior to the reporting date NIS 2.75%-4.90% 2.75%-4.90% Dollar 1.88%-4.58% 1.88%-4.58% On-call 3.10%-4.25% 3.10%-4.25%

F. Liens - To secure the NIS 1,010 million debt to banks, Delek Israel issued debentures to the banks, in which it placed an unlimited floating lien on the inventory in its possession, its consideration and the rights in respect thereof as defined in the debentures. In addition, Delek Israel guarantees all debenture-raising of Delek Petroleum issued from institutional investors, and the proceeds from debentures raised by Delek Petroleum was provided as a loan on the same terms to Delek Israel, except for the interest rate charged to Delek Israel, which was 0.05% higher than interest on the debentures, and a number of additional terms laid down between Delek Israel and Delek Petroleum. Furthermore, Delek Petroleum has provided, as a loan to Delek Israel all the funds it raised from time to time in issuances of commercial paper. The total balance of the loans extended to Delek Israel as at December 31, 2009, as described above, amounted to approximately NIS 324 million. In January, 2004, in an issuance of debentures by the parent (Delek Petroleum), Delek Israel encumbered under a senior fixed lien unlimited in amount, all of its rights in respect of the loans extended by Delek Israel to the Delek Group. In addition, Delek Petroleum placed a lien on 25% of its equity in Delek Israel in favor of Israel Discount Bank Ltd., in order to secure a loan taken by Delek Petroleum from Discount Bank.

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1.8.17 Taxation Other than the regular corporate tax laws (see additional details in Note 43 to the financial statements), it is noted that under the Fuel Excise Law, 5719-1958 and the Fuel Excise Order, 5640-1980, a tax is imposed in a defined amount on the fuel products listed in the Order, which is updated every three months according to changes in the CPI. In January 2005, an order was issued whereby the rates of the excise tax on diesel fuel and kerosene would be raised gradually to equal the excise taxes on gasoline, over a period from 2005 until 2009. The excise tax component in fuel prices is highly significant. Fuel companies are charged excise tax directly upon issuing the fuel, with 10 days’ credit, whereas the number of credit days granted by Delek Israel to its customers is significantly higher, especially for diesel fuel sales. The primary tax rate applicable to Delek Israel is different to the effective tax rate, due mainly to the timing differences between expenses and unrecognized discounted expenses. 1.8.18 Environment Delek Israel's operations are regulated under various laws, regulations and directives concerning protection of the environment. Delek Israel works constantly to minimize and prevent possible damage to the environment, investing considerable resources to do so. Delek Israel has increased its investments in this area since Water (Prevention of water pollution) (Gas stations) Regulations, 5757-1997 were promulgated, which include comprehensive provisions aimed at regulating this issue and preventing soil and water pollution. A trend of stricter enforcement of environmental laws is evident in recent years. See section 1.8.18i for details of a pending indictment in this matter. The provisions and effects of the principal laws, regulations and orders relating to the environment and applicable to Delek Israel are these: A. Cleanliness Preservation Law The Cleanliness Preservation Law, 5744-1984 (“the Cleanliness Preservation Law”) imposes criminal liability on whoever disposed of waste (including fuels) in the public domain and or dirtied the public domain. The Cleanliness Preservation Law grants authority to levy fines, issue an order requiring the polluter to restore the polluted area or to impose double the expenses for restoration of the site by the authorities. B. Water Law and Regulations The Water Law, 5719-1959 (“the Water Law”) impose liability for polluting water sources. The Water Law grants State authorities extensive powers, including the authority to demand termination of the pollution, restoration, to levy fines and charge expenses. The Water (Prevention of water pollution) (Gas stations) Regulations, 5757-1997 (“the Water Regulations“) promulgated by virtue of the Water Law, include comprehensive provisions aimed at regulating this field and preventing soil, water or air pollution. The Water Regulations include, inter alia, provisions requiring gas station operators to install various means of protection for various matters, including the construction of a sealed floor and a drainage system, regular periodic inspections, to fix leakages and report them immediately, and to adapt old gas stations to the current standards. The gas station operator is defined in the Water Regulations as the business license holder, or the person under whose supervision, management or control the station operates. It is noted that in the supply contracts, the liability for handling this matter is imposed on the gas station owner or his operator. As noted above, at December 31, 2008, Delek Israel operates, itself and through its operators, 199 gas stations (of which 115 are stations established before 1997), in which liability for pollution control and treatment is imposed on Delek Israel. Most of Delek Israel's gas stations are located in high risk areas for groundwater pollution. Under a multi-year contract with the Ministry for Environmental Protection and based on the Ministry's requirements prior to the signing that contract, Delek Israel ran about 60 tests at its gas stations. At 35 stations soil and groundwater pollution was found from past violations and fuel infrastructure leakages in respect of which Delek Israel made provisions in its books. Soil surveys and groundwater monitoring bores were carried out at these stations in order to characterize the type of pollution. At the other stations, where no pollution was found, Delek Israel was required by the Ministry for Environmental Protection and the Water Commission to conduct annual monitoring tests. Following receipt of the status, treatment for restoration of the soil and water will begin, using standard technologies and in cooperation with the Water Commission and the Ministry for Environmental Protection.

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The cost estimate for cleaning up soil and water contamination depends on its size of the contaminated area and the severity of the contamination. C. Means of monitoring in old gas stations Under the Water Regulations, Delek Israel is required to install monitoring means in all gas stations built before 1997 (“the Old Stations”) to detect fuel leakage into the and beneath the gas stations. Delek Israel installed the required monitoring means in the Old Stations. D. Impermeability tests The Water Regulations require that regular impermeability tests (once every five years) be conduced on the pipes and tanks at all gas stations. At the date of this report, tests were completed in most of Delek Israel's gas stations, and the remaining tests are expected to be completed by the end of 2010. The cost of these tests is immaterial to Delek Israel and will not significantly affect its results unless soil or water pollution is detected. E. Clean Air Law, 5768-2008 On July 22, 2008, the government adopted the Clean Air Law, 5768-2008. The law is meant to improve the quality of the air and to prevent and reduce air pollution by means of a series of treatments under a single legislative procedure. Most of the law comes into force on July 1, 2011. A gradual transition period which ends on March 1, 2015 was set for enforcement of the obligation to obtain a permit for emission sources requiring a permit under the law, including inter alia, the energy industries and the gas and fuel refinery industry in particular. F. The Environmental Protection (Polluter pays) (Legislative amendments) Law, 5768-2008 On July 29, 2008 the government adopted the Environmental Protection (Polluter pays) (Legislative amendments) Law, 5768-2008, which came into force on October 10, 2008. The objective of this law is to protect, maintain and improve the environment and to prevent damage to the environment or to public health, and to negate the economic viability of causing harm to the environment, inter alia, by means of punishment that takes into account the value of the damage caused and the benefit or profits gained by the commission of environmental crimes. In addition to stricter penalties for environmental violations, the Court is authorized, for a violation by a person that resulted in that person gaining a benefit or profit, to impose a fine at the value of the benefit or profit in addition to any other punishment. G. Bills on environmental issues In recent years several bills on environmental issues have been proposed which are liable to impact Delek Israel if they are adopted, such as the Bill for the Encouragement of Use of Environmentally Friendly Vehicles (Legislative Amendments), 5766-2006, for encouraging the use of vehicles that are environmentally friendly and which lower the level of air pollution compared to gasoline engines and of noise nuisances; the Bill for Reduced Greenhouse Gas Emissions, 5766-2006, which defines goals for significantly reducing greenhouse gas emissions and promoting a national multi-year plan to reduce greenhouse gas emissions; the Bill for the Restoration of Contaminated Soil, 5767-2007, for solving the problem of soil and groundwater contamination in order to protect the environment and public health in Israel from pollution caused by the presence of hazardous substances in the soil. H. Additional environmental requirements 1. In November 2005, the Ministry of the Environment published framework terms for gas stations, enabling the authorities, under certain conditions, to carry out additional station infrastructure improvements that are not included in the water regulations published in 1997, e.g. sealing beneath the pumps, installation of overfilling limiters and the installation of means for preventing cathode protection spillovers. The total cost of meeting these requirements is approximately NIS 150,000 per station. At the report date, Delek Israel was required to conduct 60 tests as described above. The estimated cost of these tests and treatment in 2008 is estimated at NIS 15.5 million over the years 2009-2010. Delek Israel reached an agreement with the Ministry for Environmental Protection to install a vapor retrieval system at 70 of its stations (old) over the next six years as of 2008, at overall cost of NIS 14 million, and in addition to the installation of the Stage 2 vapor retrieval system at its new stations under construction. To date, such retrieval systems have been installed at 25 stations (the majority of which are Old Stations).

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2. In February 2008, Delek Israel received from the Ministry of Environmental Protection draft framework terms for a fuel tank farm, which would determine benchmarks and requirements applicable to Delek Israel with regard to operation of the tank farm, in order to protect the environment. The draft contains provisions dealing with the prevention of soil and water pollution, including the manner of discharging industrial wastes, the installation of waste treatment facility, determination of the quality of wastes to be discharged into the sewerage system, tank testing, pipe testing, installation of means for locating leaks in tanks, as well as the testing and treatment of contaminated soil and water. I. Criminal proceedings related to environmental protection Failure to comply with the provisions of the Water Law and Water Regulations could constitute a criminal offense, carrying a one year prison sentence or a fine of up to NIS 350,000, and heavier penalties in the event of an ongoing offense. One indictment concerning environmental issues has been filed against Delek Israel and its managers, alleging contamination of soil and groundwater, and was filed against Delek Israel’s then CEO, its VP Sales and several of its marketing staff. To date, the indictment reading session has been held. The evidentiary hearing is scheduled for April 29, 2010. At ther same time, the parties are negotiating a possible plea bargain. J. Stricter enforcement of the prevention of diluted fuel sales In April 2008, the Knesset adopted an amendment to the Vehicle Operation Act (Engines and fuel) Law, 5721-1960, the purpose of which is to minimize the sale and supply of gasoline blended with diesel fuel, kerosene, heavy fuel and other substances, for which the prices and taxes payable are significantly lower than the price of the fuel. Under the amendment, every gas station operator is required to conduct at least six annual tests to have product quality verified by an authorized laboratory. Sanctions against nonstandard oil products will be increased significantly, including possible administrative closure orders, publication of the names of gas stations which sell non-standard products, and significantly higher fines. The provisions of the amendment came into force on October 10, 2008. Delek Israel believes that enactment of the law as currently worded will not have a materially negative impact on the company. For the investigation conducted / in progress against Delek Israel in connection with fuel dilution which came to light in October 2006, see Note 33A2 to the financial statements. Delek Israel is unable to evaluate the exposure in claims concerning the October 2006 fuel dilution issue, if any. K. Fuel supply facilities The Ministry of Environment requires installation, at supply facilities that issue gasoline, of a vapor retrieval system to treat gasoline vapors collected from petrol tanks of stations when these tanks are being filled. The Ashdod facility had already included such a system upon its acquisition by Delek Israel in July 2007. The Be'er Sheva and Jerusalem facilities have no such systems, hence no gasoline is supplied from said facilities. The installation and operation of the system at the supply facility in Haifa was completed at the end of April 2007 at a cost of NIS 3 million. For a description of the petition for approval of a class action with respect to the delay in installing a vapor retrieval system at the Haifa terminal, see Note 31A5 to the financial statements. L. Bottom filling system According to Ministry of Transportation regulations, Delek Israel is required to install a bottom filling facility in its distribution facility and in its petrol tankers in order to prevent environmental pollution when the tankers are filled. At the date of this report, Delek Israel has completed the installation at its distribution facility in Haifa and in all its tankers. Delek Israel has acquired the Pi Glilot supply facilities including such systems, except for the Jerusalem facility which has no such system since supply at this facility by gravitation. Since investment in construction of a system in order to change the current supply method, adapting it to requirements with regard to vapor retrieval and bottom filling was found to be economically unfeasible in all aspects, considering future fuel supply volume at the facility and the supply rate compared with the required investment – no bottom filling system has been installed and fuel supply has been completely discontinued from this facility. M. Fuel oil distribution facility in Ashdod Ionex (a Delek Israel subsidiary (75%)) operates a fuel oil distribution facility for which it has a lease from Ashdod Port through June 15, 2010. At the demand of the Ministry of

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Environmental Protection, the soil in this facility was surveyed, with no adverse findings requiring treatment. Ionex and the Ministry of Environmental Protection discussed the addition of terms to the business license of the Ashdod supply facility, relating to the need for special investment for preventing future contamination. Ultimately, the parties agreed on the special terms to be added to the business license while others were deleted and will be added to the business license of the winning bidder on the tender for operation of the supply facility that will be issued by the Israel Ports Company. N. Hazardous materials According to the Hazardous Materials Law, 5753-1993 ("the Hazardous Materials Law"), oil distillates are defined as hazardous materials. The Hazardous Materials Law prescribes a duty to hold a "poisons permit" from the supervisor who is authorized to issue it by the Environment Minister. Delek Israel has permits to hold hazardous materials as defined in them, and to trade in fuels without storing them. O. Projected significant costs and investments in environmental issues In 2009 and 2008 total expenses and costs incurred by Delek Israel in fueling and commercial compounds for compliance with statutory and official requirements concerning environmental issues amounted to approximately NIS 9 million and NIS 5 million, respectively (excluding investment in the construction of new gas stations in compliance with statutory environmental requirements). Since Delek Israel's Old Stations (about 134 in number) were built according to standards that predate the Water Regulations, and since accumulated knowledge indicates that the required standards of that period cannot ensure prevention of damage to soil and/or water, Delek Israel cannot estimate which of its Old Stations polluted the soil or the water surrounding the stations. If such pollution, unknown at the date of this report, is identified, Delek Israel, estimates that it will be required to allocate significant investments to that end. Delek Israel has submitted to the Ministry of Environmental Protection a work (rehabilitation) plan for locating, monitoring and surveying soil and water at its Old Stations (established prior to January 1, 1998) operated by or on behalf of Delek Israel. According to the plan, all surveys will be completed within 3-10 years from start of work plan, with at least 15 gas stations surveyed and completed in each calendar year. After these surveys, Delek Israel will prepare an individual soil rehabilitation plan for each station found to be contaminated – to be submitted for review by the Ministry of Environmental Protection. Once the results of the review are known, Delek Israel will start rehabilitation work in the relevant station, with such work on the final station to start no later than in the seventh years after the start of the rehabilitation plan. The Minister for Environmental Protection indicated to Delek Israel that the Ministry regards favorably the formulation of a plan for cleaning up contamination from gas stations, and action based on such plan in coordination with the Ministry. Nevertheless, it is Ministry policy to enforce provision of environmental protection statutes, and execution of the plan would not grant immunity from enforcement of the law where its provisions were violated or result in the cancellation of indictments already filed. However, when considering the legal and public justification of prosecution, all circumstances of the matter would be taken into account, including actions taken by the violating entity. It is noted also that to the best of Delek Israel’s knowledge, a number of fuel companies have submitted similar plans to the Ministry of Environmental Protection. Details of costs (expenses involved in ground- and underground water treatment) and investments (in equipment and means to prevent and alert to such contamination) estimated for the coming years in fuel and commercial compounds are as follows: 2010 2011 2012 (NIS thousands) (NIS thousands) (NIS thousands) Anticipated significant costs 2,200 1,300 1,500 Anticipated significant investments 6,500 8,200 8,300 Total 8,700 9,500 9,800

This information on the estimated costs and investments is to be considered forward-looking information that might not be realized in the future if Delek Israel is found to be in breach of regulations or if new regulations issued by the Ministry of Environment will come into force, obliging Delek Israel to allocate additional funds.

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P. In conjunction with understandings and agreements with the Ministry of Environmental Protection, Delek Israel began implementing a plan to install vapor retrieval systems at part of the stations as noted in section 1.8.18H at a total cost of NIS 8 illion. Q. The direct marketing activities of Delek Israel in internal gas stations located on customer premises is also subject to the provisions of the Water Regulations, as described in section 1.8.18B. The gas station operator as defined in the Water Regulations is held responsible for implementing these provisions. It is possible that a court may rule, if the matter is brought for its decision, that in view of the terms of the agreement between Delek Israel and the owner of the internal station, that Delek Israel is also considered to be a “station operator”. However, a recent decision regarding an indictment of Delek Israel in connection with a public gas station to which Delek Israel supplied fuel, Delek Israel and its management were cleared of all charges. See section 1.8.18B for details of the responsibility of a “station operator”. R. A subsidiary of Delek Israel subsidiary (Delek Oils Ltd. – "Delkol"), removes industrial waste in accordance with the provisions of environmental laws. In addition, activity related to infrastructure and sealant products is subject to comprehensive control, designed to prevent adverse effect on the environment. A trend of stricter law enforcement in this area in recent years, which has implications mainly for investments required to build and maintain bitumen tanks that requiring constant heating. S. In 2009 - 2009, total costs and investments by Delek Israel in direct marketing and storage and supply operations for compliance with statutory provisions and official requirements concerning the environment, were negligible, and Delek Israel does not foresee any material costs in these areas of operation. This information on estimated costs and investments should be seen as forward-looking information that might not be realized if serious deviations are found in the activities of Delek Israel, or if new environmental requirements come into force, necessitating material expenditure. 1.8.19 Limitations and supervision of Delek Israel's operations Below is a description of the main limitations and supervision that apply to Delek Israel, in addition to the supervision concerning the environment described above: A. Legislation specific to the fuel economy: 1. Arrangements in the State Economy (Legislation amendments for achieving the budget and economic policy goals for fiscal 2001) Law, 5761-2001 ("the State Economy Law") – This law states that a fuel company must be registered before commencing operation, and may continue to operate as long as it is registered in the register maintained by the Fuel Administration. Delek Israel and Gal Fuel Co. Ltd. (a subsidiary of Delek Israel) are registered in the Fuel Administration Register as fuel companies. It should be further noted that the State Economy Law states that a fuel company must maintain, at its own expense, such stock of fuels as is determined by the National Infrastructures Minister in consultation with the Ministers of Defense and Finance, and that the State has promulgated regulations1 by virtue of the State Economy Law that regulate his matter. In November 2002, the High Court of Justice approved an interim arrangement requiring the maintenance of security inventory, but the State can change the present status to require also the maintaining of a civil inventory.. 2. Fuel Economy (Promotion of competition) Law, 5754-1994 – The law lays down, inter alia, limitations on the opening of new gas stations near stations marketing the products of the same fuel company or operated by the same operator. The section in the law that deals with the limitations for the matter of a regional engagement between gas stations of one fuel company is in force through the end of July 2018. In December 2007, the Fuel Industry (Promotion of competition) (Amendment No. 2) Law, 5767-2007, is designed to regulate the advertising of prices at gas stations in order to increase competition and prevent deceit in prices. 3. Fuel Economy (No sale of fuel to specific gas stations) Law, 5765-2005 – This law bans the sale and supply of fuel to gas stations unless they are on the list maintained by the Fuel Administration. At the reporting date, most of Delek Israel's public gas stations are included in the list published by the Fuel Administration.

1 Arrangements in the State Economy (Legislation amendments for achieving the budget and economic policy goals for fiscal 2001) (Maintaining inventory and security inventory of fuel) Regulations, 5761-2001.

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4. Control of infrastructure service tariffs – Infrastructure services provided to the various fuel companies and that include, inter alia, the unloading, transportation, storage and issue of fuel products, are provided, at the reporting date, to all the companies recognized as fuel companies at tariffs laid down in the Commodities and Services Price Controls (Temporary order) (Infrastructure tariffs in the fuel economy) Order, 5756-1995 (“the Infrastructure Tariff Order”). This Order is intended to ensure collection of a maximum price for the various infrastructure services. 5. Excise – Under the Excise Law, no person shall manufacture fuel nor deal in its sale without a license from the Customs and Excise Administration. Delek Israel has been issued with such a manufacturing license, which it renews each year. Excise is levied on fuel when it is issued at a supply facility or when it is released from customs in the case of import. As a result, only companies holding such a manufacturing license may purchase oil distillates directly from refineries in Israel or import them. The Excise on Fuel (Levying excise) Order, 5764-2004 (“the Excise Order”) sets specific excise rates for every oil product. In January 2005, the Excise on Fuel (Amendment No. 3 and temporary order), 5764-2004 and the Excise on Fuel (Exemption) Order, 5764-2004 came into force, raising the excise rate on diesel fuel and kerosene gradually from 2005 to 209, to equal that levied on benzene. Delek Israel believes, based on past experience, that this change could have a negative effect upon its business results, mainly because of the difference between the dates of payment of the excise by Delek Israel and the time elapsed until it is collected from customers. Furthermore, the Excise on Fuel (Exemption) Order states, inter alia, that fuel used by marine vessels is exempt from payment of excise in respect of the fuel, provided that the vessel, after fueling, leaves and operates outside the territorial waters of Israel. 6. Hours of Work and Rest Law, 5711-1951 – Under Section 9 of this law, employing Jewish employees on Saturday, which is part of the statutory weekly rest period, must be approved by the Minister of Labor. Furthermore, the Hours of Work and Rest Law states, inter alia, that on rest days as defined in the Administration and Rule and Justice Ordinance, 5708-1948, no store owner shall conduct business in his store. The above law lays down a penalty or up to one month's imprisonment or both for whoever employs staff in breach of the law. Under the Administrative Offences (Administrative penalty – Hours of work and rest) Regulations, 5758-1998, violation of this provision is an administrative offence, punishable by a defined administrative penalty. Furthermore, in addition to the provisions of the above laws, there are regulations applicable to some of Delek Israel’s fueling and commercial compounds, whereby certain businesses may not open on Saturday. Most of Delek Israel’s public gas stations and some of its convenience stores operate on Saturdays. To date, the restrictions imposed by these laws have had no materially negative impact on Delek Israel’s business results, and Delek Israel estimates, based on past experience, that they will not do so in the future. Delek Israel’s aforementioned estimate is forward-looking information which may not materialize, inter alia, due to stricter enforcement of provisions of the Hours of Work and Rest Law all over Israel, which could lead to convenience stores being closed on Saturdays. As at the reporting date, investigations were conducted in the past against Delek Israel in connection with convenience stores and gas stations operating on Saturdays. All the foregoing investigations were concluded without any legal / criminal proceedings instituted agains Delek Israel. 7. Vehicle Operation (Engines and fuel) (Supply of fuel by tanker) Order, 5768-2007 (“the Fuel Supply Order”) was enacted pursuant to the Vehicle Operation (Engines and fuel) Law, 1961 (“the Vehicle Operation Law”). The Order states that a motor vehicle will run on gasoline, diesel, LPG or other fuel determined by the Vehicle Operation Law, provided it meets standard requirements for the product and requirements laid down in the Order, if any. The Order imposes liability on fuel companies supplying gas stations, on owners of a supply facility, on the owner of a gas station and on transporters of fuels to gas stations – requiring them to take all reasonable precautions to ensure that every fuel product supplied is in compliance with the requirements of an official Israeli standard as defined in the Standards Law, 5713-1953 (“the Standards Law") and with regulations pursuant to the Vehicle Operation Law, by means of duties imposed on each such entity within its area of responsibility. 8. Fuel Economy Bill, 5767-2007 ("the Fuel Economy Bill") – At the beginning of 2007, a draft of the Fuel Economy Law, 5767-2007 ("the Draft Fuel Economy Law") was distributed. The aim

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of the draft, according to its synopsis,1 is to regulate all the operations in the fuel economy, from its financial, safety and consumerism aspects, by setting an appropriate licensing and regulatory regime. Delek Israel is unable to assess whether the Fuel Economy Bill will pass or not, and if so, when. Delek Israel estimates that approval of the Fuel Economy Bill in its current version, if at all, will not materially impact its results. 9. Proposed Fuel Economy (Promotion of competition) (Rules for automatic filling devices) Regulations, 5767-2007 (“the Proposed Automatic Filling Device Regulations”): At the beginning of 2007, the Ministry of National Infrastructures proposed, pursuant to section 7(b) of the Fuel Economy (Promotion of competition) Law, 5754-1994, the Automatic Filling Device Regulations. Highlights from the proposal include the establishment of a “universal filling array”, which is defined as an automatic filling array in which every each gas station, irrespective of its ownership, may install a reader. Under these regulations, only universal readers will be able to be installed in gas stations. The “automatic filling array” is defined in the proposal as an array of readers and filling devices enabling a vehicle to fill up with gas the vehicle is identified and the volume of fuel is measured electronically, and the information is then transmitted electronically for computerized billing. The universal filling array will be set up by a principal who, according to the proposal, is not a fuel-marketing company and is not owned by such a company, other than a maximum stake of not more than 10%. According to the proposal, any vehicle in which a universal filling device is installed will be bale to fill up at any station where a universal reader is installed. Delek Israel is unable to assess whether the proposed regulations will be enacted or not, and if so – when. Delek Israel believes that approval of the Proposed Automatic Filling Device Regulations, as currently proposed and if enacted, could involve significant expenditure for Delek Israel (the extent of which cannot currently be estimated), for conversion of existing Dalkan devices into universal filling devices. Furthermore, making fueling devices universal would increase the number of stations where customers can purchase fuel products, which could result in a decrease in the number of customers purchasing fuel products using Delek Israel’s automatic filling array. B. Price Controls 1. Supply of fuel products by ORL to the fuel companies – ORL was declared a monopoly at the time in the refining of crude oil in Israel. At present, only various types of bitumen, sold by ORL and ORA, are still subject to maximum ORL ex-works prices and are set by the Commodity and Service Price Stability (Temporary order) (Maximum ORL ex-works prices for oil products) Order, 5752-1992 (“ORL Ex-Works Price Order”), which sets the maximum prices for the various fuel products at ORL's factory gate (see Section 1.8.1B). The ORL ex-works price is updated on the first of every month according to the external price of the oil product plus or minus a sum set by the Fuel Administration director with the approval of the Ministers of Energy and Finance. To date, after privatization of the oil refineries, the price setting mechanism has not changed. Of Delek Israel's fuel product purchases, its purchase price for controlled price products in 2009 and 2008 amounted to 0.05% and 0.2%, respectively. 2. Price to the Consumer – Commodity and Service Price Control (Maximum prices at gas stations) Order, 5762-2002 – Under this Order, the maximum price for lead-free 95 octane gas sold at a public self service pump is fixed, as are the date and methods of its update. It is noted that until February 2009, this Order also set the maximum price for 96 octane gasoline. 3. Control of infrastructure prices – Infrastructure services relating to fuel products in Israel, which include, among others, unloading, piping, storage and issue of fuel products, are provided, at the reporting date, to all recognized fuel companies at tariffs set by the Infrastructure Price Control Order. The Order names the infrastructure services to which it applies, and sets maximum tariffs for those services. Furthermore, the Order sets a tariff for the supply of oil products for some of the existing supply sites in Israel. C. Essential enterprise – Delek Israel, its gas stations and supply terminals have been declared an Essential Enterprise as approved by the Ministry of Industry, Trade and Employment. Under this approval, during an emergency, Delek Israel’s fleet and its storage and supply facilities are mobilized for the national emergency in order to enable a regular supply of fuels and gas.

1 The Fuel Economy Bill, 5767-2007 and its memorandum can be found on the Ministry of National Infrastructures website at www.mni.gov.il .

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D. Weights and Measures Ordinance, 5707-1947 ("the Weights Ordinance”) – The Weights Ordinance sets standards for weights and measures, including the liter is the measure of volume. The Weights Ordinance describes a number of offenses, among them refusal to cooperate with the inspector, and the possession for use in commerce or for commercial use of instruments not certified by the inspector, or instruments that have been tampered with. By virtue of the Weights Ordinance, the Weights Regulations were promulgated and lay down, among other things; how liquid fuel pumps are to be tested and calibrated, and the obligation to place a calibration seal on the pumps after they are tested and calibrated by the inspector. In addition, the Weights Regulations set out provisions for instruments that measure oil products assembled on tankers, including placing a calibration seal upon the instruments. The Weights Ordinance prohibits the use of such instruments unless they have been calibrated and sealed in accordance with the Weights Regulations. All Delek Israel storage and supply terminals, other than the supply terminal in Haifa, have calibration certificates for measuring equipment through December 31, 2010. Final calibration tests of equipment at the Haifa terminal are currently underway. E. Gas station operation licenses The licensing proceeding for new gas stations is long and complicated and requires large investments that involve obtaining approvals and licenses from numerous entities. This proceeding is regulated under many laws which grant licensing powers to various governmental authorities. Below are the main ones: 1. Planning and Construction Law, 5725-1965 (“the Planning Law”) and its Regulations – Pursuant to this law, the National Planning Council approved a "National outline Plan for Gas Stations", setting conditions and criteria for the erection of gas stations. Under the Planning Law and its Regulations, any use of land – erecting a structure, the use of any structure, etc. – requires approval. A building permit for construction of a gas station often requires a change in the designated use of the land In the first half of 2006, Amendment no. 4 to National Outline Plan no. 18 came into force, the purpose of which is to adapt the array of gas stations to the needs of Israel's population while ensuring appropriate service for consumers and preventing transportation, safety, visual or environmental nuisances. Most of the change is that local Planning and Construction Committees are authorized to approve construction of a gas station in any “built-up area” including areas zoned for residential, office, commercial or other uses, whereas today this authority is limited to industrial zones or combined industrial and commercial areas. Another change in the plan is the possibility of setting up “mini” stations, an option not available under National Outline Plan no. 18. Mini stations require a smaller capital investment than that required now for public gas stations. A mini gas station is any station that can serve up to four 4-ton vehicles simultaneously and no structure can be added to such station other than a roof over the gas pumps. 2. Business Licensing Law, 5728-1968 (“the Business Licensing Law”), its Regulations, and Orders issued pursuant thereto: A) Business Licensing (Businesses requiring a license) Order, 5755-1995 – Under this Order, gas stations are businesses that must be duly licensed The licensing authority is the local authority in whose jurisdiction the gas station is located. To operate a gas station requires receipt of approval from the following main authorities: Israel Police, Ministry for Environmental Protection, Ministry of Industry, Trade and Labor, the Fire Service and the relevant Planning and Construction Committee. B) Business Licensing (Fuel storage) Regulations, 5737-1976 ("the Fuel Storage Regulations") – Regulations promulgated by virtue of the Business Licensing Law, which set out detailed provisions for how to obtain a business license for a gas station. The Regulations describe, among other things, the fuel safety and storage conditions for receipt of a license. C) Business Licensing (Sanitary conditions in gas stations) Regulations, 5730-1969 – These regulations set provisions concerning the sanitary conditions and facilities at gas stations. D) Business Licensing (Hazardous plants) Regulations, 5753-1993 – Under these regulations, a business that stores, produces, processes or sells hazardous materials must have a special license to do so, and must comply with the safety provisions laid down in or by virtue of the law.

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3. Supervision of Commodities and Services (Garages and vehicle-related factories) Order, 5730-1970, issued pursuant to the Supervision of Commodities and Services Law, 5718- 1957, forbids the opening or operation of a gas station without a license from the Division of Vehicles and Maintenance Services at the Ministry of Transport. F. Most of Delek Israel’s public gas stations and convenience stores have received business licenses or temporary permits pending receipt of a permanent permit. Concerning other gas stations and convenience stores, Delek Israel or the station owner is working towards receiving business licenses or temporary permits, and Delek Israel believes there is nothing material preventing their receipt. G. At the reporting date, five indictments are pending against Delek Israel relating to the operation of gas stations and/or convenience stores without a business license or deviation from a permit. The indictments were filed against Delek Israel’s CEO, against a number of its senior managers, and against station owners / operators. In addition, one more indictment charges a subsidiary of Delek Israel with prima facie unlawful use of its offices. In Delek Israel’s estimation, beyond insignificant fines, it has no material exposure in this context. Concerning such exposure, Delek Israel's assessment is forward-looking information based on Delek Israel's past experience, which might not materialize, inter alia due to the occurrence of events contrary to Delek Israel's expectations H. Ionex supply facility requires a business license, as do the Delkol and Bitum plants. At the reporting date, Ionex's fuel supply facility and the Delkol plant have a business license granted in perpetuity. The Bitum plant has no valid business license; however, Delek Israel operates based on a poisons permit from the Ministry of Environmental Protection and approval from the Regional Fire Brigades Association. The business license was suspended by Haifa Municipality due to an inconsistency in building permits, and Delek Israel is working to obtain permits for the buildings. I. Storage and supply operation require a business license. Part of the conditions for issue of a business license is a requirement for additional permits, such as fire extinguishing approval and approval from the Ministry for Environmental Protection. The supply facilities in Ashdod, Beer Sheva and Jerusalem have permanent valid business licenses. To date, the Haifa depot has a temporary business license valid until April 20, 2010 and Delek Israel is acting to obtain a permanent business license. J. Concerning the internal gas stations on kibbutzim or moshavim, the ILA Agricultural Division orders provides that an internal non-commercial gas station can be set up within the area of the agricultural settlement without requiring payment to the ILA, subject to certain conditions. The establishment of an internal station requires receipt of a building permit and operating approvals. K. Antitrust 1. Exclusive supply agreements with gas stations: On October 27, 1997 the Anti-Trust Commissioner and Delek Israel reached an agreement (“the Agreement”), that was submitted for the approval of the Antitrust Tribunal (“the Tribunal”), whereby the Commissioner narrowed the scope of his decision of June 28, 1993 (“the Original Decision”), according to which the delivery agreements between the fuel companies and gas stations which are not owned or under primary lease from the ILA, are cartels, so that the Original Decision will apply only to gas stations in which Delek Israel does not have an "accepted lease agreement" i.e. a lease agreement under which the lease fees paid exceed a certain amount, as defined in the agreement with the Commissioner). Also laid down in the arrangement are the terms for future engagement of Delek Israel with gas stations, while making exclusivity agreements but where Delek Israel can request specific approval also for longer periods from the Tribunal. These terms include, among others, an obligation for Delek Israel to file a request with the Tribunal for approval of such agreements. The Commissioner announced that he would recommend to the Tribunal that it approve exclusive supply agreements for limited periods of between one and 14 years, depending on the special circumstances of the station for which approval of the agreement is requested. In addition, Delek Israel has undertaken that there will be no partnership or other arrangement between it and Paz and/or Sonol for rights in gas station land or in marketing agreements with the gas station operator.

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Under the arrangement, Delek Israel agreed to the immediate release of 35 of the 65n stations with which it did not have an “accepted lease agreement", while the Commissioner has agreed to support approval of Delek Israel's agreements with some of the 30 other stations for fixed and limited periods, according to the specific circumstances. As present, most of the stations have been released from their obligation to purchase fuel exclusively from Delek Israel. However, most of these stations continue to purchase fuel from it. On July 1, 2002 Delek Israel reached agreement with the Commissioner regarding a consensual order according to Section 50B of the Restrictive Trade Practices Law, 5748- 1988 “the Consensual Order”), which was confirmed by the Tribunal. One of the main points of the Consensual Order is that Delek Israel's renting of gas stations for a period longer than seven years, in the circumstances described in Section 17 of the Restrictive Trade Practices Law, would be seen as a merger. This means that in those cases, the transaction needs the consent of the Commissioner. On January 21, 2007, Delek Israel received a request for information from the Commissioner, for the submission to the Authority of information with regard to Delek Israel’s rights in stations where other fuel companies also have rights. Delek Israel responded to the Authority’s request in letters dated February 4, 2007 and February 8, 2007. Delek Israel was required by the Commissioner to separate sub-leasing rights shared by Delek Israel and another fuel company in one of these stations. On March 18, 2008, Delek Israel entered into an agreement whereby it acquired the sub-leasing rights of the other company, thereby complying with the Commissioners requirement with regard to this station. 2. Commissioner's approval for the merger of Pi Glilot and Delek Israel – As part of the acquisition of the three storage and supply depots by Delek Israel, the Commissioner issued approval for this merger, with the following main points: A) Delek Israel and any person controlling it, corporation controlled by it and any corporation controlled by any of them (jointly referred to in this sub-section 1.8.19K as “Delek Israel") shall not unreasonably deny distillate supply services to anyone requiring them from the Ashdod and Jerusalem supply facilities, under terms that were acceptable at Delek-Pi Glilot facilities prior to the merger, and shall not make provision of supply services contingent upon conditions which, by their nature or under acceptable trading terms, are unrelated to the subject of the engagement. Delek Israel shall not set different terms of engagement for similar transactions for providing supply services, shall not discriminate among its customers, and shall not make the provision of supply services or grant of any benefits contingent upon the purchase or receipt of other products or services. B) Throughout operation of the Ashdod supply depot, Delek Israel will allocate storage tanks at the Ashdod depot to a third party for operating storage, as provided in the appendix to the privatization agreement, unless permitted otherwise in advance and in writing by the Commissioner During the term of lease of tanks as referred to this section, Delek Israel will be responsible for their operation and proper maintenance so as to ensure continuous service and repairs as provided by Pi Glilot prior to the merger. C) Delek Israel shall not engage, directly or indirectly, with another person in an arrangement conferring upon it rights in infrastructure necessary for importing or refining operations or in land designated for the construction of infrastructure facilities, without the prior written consent of the Commissioner. The provisions of this section shall not apply to agreements in effect prior to this decision, between Pi Glilot and another person holding or operating storage or piping infrastructure for oil products or LPG, which are necessary for ensuring regular operation of the national piping network, or to the extension of such agreements. D) Unless otherwise authorized by the Commissioner, any restriction applicable to any corporation by virtue of the Commissioner’s approval applies also to any officer, agent or consultant of a corporation and to any agent or substitute of any of the aforementioned – all by statute or agreement or in practice. L. Recognized supplier to the Ministry of Defense Delek Israel participates in tenders published by the Ministry of Defense which contain standards and threshhold requirements, and meets all of them. Delek Israel and Delkol are

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approved suppliers, recognized by the Ministerial Committee for the approval of suppliers to the Ministry of Defense. M. Standardization Israel has standards for the fuels that are marketed in Israel. Delek Israel markets only those products that meet these standards. Delek Israel and Delkol have permits from the Israel Institute of Standards in connection with ISO 14001 (quality of the environment), ISO 9001 (quality management) and Israeli Standard SI 18001 (safety management). These permits are valid through March 31, 2010, October 31, 2010 and April 30, 2010, respectively. Delek Itum (Bitum) Ltd., a subsidiary of Delek Israel which holds a bitumen plant, has permits from the Israel Institute of Standards in connection with ISO 9001 (quality management) valid through August 31, 2010. Delek Israel also has a Standards Approval for sheeting it imports. In addition, in October 2006, the Fuel Administration published service standards designated as a normative code of conduct for the fuel infrastructure economy, in order to improve service and bring it up to par with developed countries. If a particular subject is covered by an agreement between a service provider and a service recipient, the agreement supersedes these service standards, provided it is not injurious to any third party, does not contravene the principle of equal service for all and is performed lawfully. Delek Israel complies with these service standards. 1.8.20 Material agreements A. Agreements between Delek Israel and ORL and ORA are material for Delek Israel. For details, see section 1.8.13B. B. In general, the filling and commercial compounds segment has no single material agreement with regard to rights in land and the operation of the gas stations, but the entire set of agreements in the segment is material for Delek Israel. C. In general, the fuel storage and supply segment has no single material agreement, but the entire set of agreements for the provision of storage and supply services, including leasing the storage tanks, is material for Delek Israel D. A founders' agreement dated November 2, 2004 between Delek Israel and Delek Real Estate, in which the parties agreed to cooperate in the incorporation and management of DRL, which is jointly owned in equal parts by Delek Israel and Delek Real Estate. E. Agreement dated July 31, 2007 between Delek Israel and Delek Petroleum, whereby on September 28, 2007 Delek Israel sold to Delek Petroleum, after fulfillment of all conditions precedent, all its shares in Amisragas in consideration of US $72 million (NIS 290.5 million). F. Agreement dated May 24, 2007, between Delek Benelux (a company in which Delek Israel owns 20% of the share capital) and subsidiaries of Chevron to acquire Chevron’s marketing operations in Benelux countries (Belgium, Holland and Luxembourg). For details, see section 1.10. G. On March 30, 2007 Delek Motorway Services Ltd. (“DMS"), a foreign company owned (25%) by Delek Israel and (75%) by Delek Real Estate), acquired all the shares of a UK company which owns 29 Motorway Service Areas (MSA) in England under the brand “RoadChef”, including gas stations operated by the acquired company, hotels, restaurants and stores. Delek Israel’s share in the cost of acquiring the MSA shares amounted to GBP 7 million (NIS 59 million). In July 2007, Delek Israel sold its DMS shares to Delek Petroleum in consideration of the cost of its original investment. H. Pi Glilot privatization agreements – On July 31, 2007, Delek Israel and Pi Glilot entered into an agreement to acquire the terminals operation (“the Terminal Acquisition Agreement”), whereby Delek Israel acquired all rights in movable goods, land and other rights and obligations, including with regard to staff employed at the terminals, as set forth in the appendices to the agreement (“the Property Being Sold"), in consideration of NIS 806 million, after fulfilling provisions of the sale procedure and obtaining the approval of the Antitrust Commissioner (for a description of main points of the Commissioner's approval, see section 1.8.19K.2). Delek Israel acquired rights in the Property Being Sold as-is, and undertook to comply with all conditions laid down by the Antitrust Commissioner. Delek Israel undertook to operate the Property Being Sold for periods defined by the State and within limits set by the State as follows: (1) Delek Israel undertook to operate the Ashdod terminal as a storage and supply depot for at least 10 years from the acquisition date. Delek Israel may, with consent of the Fuel Administration Manager at the Ministry of National Infrastructures, sell the terminal to a third party, provided the latter commits to

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comply with the same requirements. At any time after the aforementioned 10-year period, depot operations may be cut back or discontinued, provided that the Fuel Administration is given at least 2 years' notice. The agreement further stipulates that throughout operation of the Ashdod terminal, five transit tanks would be leased to FPL, which is responsible for the fuel piping array in Israel, or to any successor thereof or to anyone designated by the Fuel Administration, in exchange for a tariff that would be set in an order. (2) Delek Israel undertook to continue operation of the Be'er Sheva terminal and to preserve its storage and supply capacity so as to ensure continued regular supply of fuel products to the Air Force base being supplied by pipeline from the depot, unless the Fuel Administration Manager confirms that an alternative arrangement is in place. Notwithstanding the above, the buyer may discontinue operation of this terminal, provided that the Fuel Administration Manager is given at least one year's notice. Delek Israel informed the Fuel Administration Manager on November 17, 2007 of discontinuation of operation of the Be'er Sheva terminal. Subsequent to negotiations with the Fuel Administration Manager, it was agreed that Delek Israel will withdraw its foregoing discontuation notice subject to the Fuel Administration Manager's undertaking to store emergency supplies at the Beer Sheva depot. At the reporting date, the Fuel Administration Manager fulfilled its undertaking and Delek Israel withdrew its notice concerning the discontinuation of operations at said depot. (3) Delek Israel undertook to operate the Jerusalem terminal as a storage and supply depot for at least 3 years from the acquisition date. The buyer may, with the consent of the Fuel Administration Manager, sell the depot to a third party, provided the latter undertakes to comply with the same requirements. At any time after this 3-year period, depot operations may be cut back or discontinued, provided that the Fuel Administration is given at least two years' notice. Delek Israel informed the Fuel Administration Manager in December 2007 of discontinuation of operation of this terminal at the end of the 3-year operation period. At the reporting date, Delek Israel intends to put up the land in Jerusalem for sale. Notwithstanding the above, the closing of any terminal by order of competent authorities would exempt the buyer from its undertakings, provided that the closure order was not given due to an act of commission or omission by the buyer. Delek Israel made an irrevocable undertaking to Pi Glilot and to the State of Israel that it would not take any action in the Property Being Sold which is not in keeping with the foregoing, and that should it decide to transfer or pledge its rights in the Property Being Sold to any third party, the transferee would undertake to act in accordance with Delek Israel's undertaking. Delek Israel and its interested parties have declared and undertaken that except for allegations against Pi Glilot in respect of breach of the Depot Acquisition Agreement, they waive any and all claims and demands of any kind against the State of Israel and/or the Joint Committee and/or any of its members and/or Pi Glilot and/or officers, managers and employees of Pi Glilot and/or anyone acting on behalf of any of the above in the sale which is the subject of the agreement. If despite the aforesaid such a claim or a claim whose cause pre-dates the agreement, in respect of which Delek Israel or its interested parties are compensated, Delek Israel shall be obliged to indemnify those entities in the amount of any compensatory amount charged to any of them. 1.8.21 Legal Proceedings For a description of legal proceedings (including motions for class action status) to which Delek Israel is party, see Note 33 to the financial statements. 1.8.22 Business strategy and objectives Delek Israel reviews it's strategic and business plans from time to time and updates them according to developments in the fuel market, the competitive environment and the economic situation. Delek Israel’s operations in the coming years are expected to focus on the following activities: A. Increasing the number of gas stations owned and operated by Delek Israel, the establishment of gas stations and convenience stores at strategic locations, and extending their deployment. B. Transition to self service at public service stations, as far as possible. C. Expansion of the Menta convenience store chain. D. Entering long-term rental contracts with gas station owners. E. Establishment of mini gas stations in strategic locations. F. Deeper penetration of Delek Israel's unique products, such as "Dragon". G. Attempt to reduce the credit given to customers and to receive additional collateral from them

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H. Establishment of retail compounds – Delek Israel intends to focus in the coming years on the area of filling and commercial sites by setting up dozens of convenience stores, filling and retail compounds all over the country, and in particular within municipal areas. I. Improvement of economically non-viable rental agreements. J. Expansion of operations vis-à-vis end consumers in direct marketing, including in internal gas stations. K. Increasing the share of Delek Israel in the automatic devices for fleets. L. Delek Israel itself, and/or in cooperation with Delek Petroleum, is reviewing options to expand overseas, primarily in Europe, through Delek Europe, in which Delek Israel has a 20% stake. M. Development of a fuel product import array in cooperation with a leading international fuel trading entity, using the Pi Glilot terminals N. Maximization of storage and supply capacity at Delek-Pi Glilot facilities. O. Establishment of a seabed pipeline for unloading distillates from ships anchored offshore directly to Ashdod port, which will save costs and reduce dependence on EAPC's facilities and on FPL’s pipelines. 1.8.23 Risk Factors Certain risk factors that threaten the operations of Delek Israel are noteworthy: A. Geopolitical situation – The global geopolitical situation has a direct influence on the economic situation, on global oil prices and on the general operations of the company and its ability to import oil distillates. Additionally, the security and political situation in Israel has a significant impact on the country’s economic situation. A slowdown in the economy is likely to lead to reduced demand for the company’s products and a resulting reduction in the volume of sales of fuel products and retail products and a decline in profitability. The geopolitical situation in southern Israel could directly impact Delek Israel’s infrastructure facilities in that region. B. Changes in exchange rates – Fuel products are purchased by Delek Israel from its suppliers in or linked to the US dollar, and therefore changes in the dollar/shekel exchange rate can affect the value of its inventories. Delek Israel's policy is to avoid currency exposure by means of various financial instruments and by taking dollar loans to finance inventory. It is emphasized that Delek Israel charges exchange rate differences in respect of operating inventory immediately as they arise, and therefore changes in exchange rates are liable to have an adverse effect on its financial results. C. Changes in interest rates – Changes in interest rates are liable to affect the loans given to Delek Israel by banks, and therefore Delek Israel is exposed to changes in interest rates. D. Changes in the Consumer Price Index – At the date of this report, Delek Israel has long- and short-term loans linked to the CPI. In addition, Delek Israel issued CPI-linked debentures in August 2007 and in June 2009, and has provided CPI-linked loans to the Delek Group and its customers. Therefore, a significant rise in the CPI could increase in Delek Israel's financing costs and as a result, harm its profitability. E. Strikes and lock-outs in the Israeli economy – Strikes and lock-outs in the Israeli economy, especially lock-outs at ports and/or the companies involved in fuel transportation, could prevent import of raw materials and the prompt delivery of orders, thereby harming Delek Israel's ability to meet its commitments to customers and damaging its reputation. F. The economic slowdown in Israel and worldwide – The global economic crisis, including in Israel, is liable to lead to a decline in the demand for fuel products in Israel, lower in the consumption of fuel and retail products purchased at Delek Israel's gas stations, and harm its business results. G. Difficulties in obtaining financing – Delek Israel finances its operations, inter alia, with bank and non-bank credit. In view of the grave global economic crisis since the end of 2008, followed by the collapse of banks and investment houses around the world, the banks have instituted more stringent requirements for granting of bank credit. Furthermore, the global economic crisis has impacted the capital market in Israel so that activity in the capital market at the end of 2008 and beginning of 2009 was minimal. In view of the foregoing, if Delek Israel requires additional financing for its ongoing operations, it is liable to encounter difficulties in obtaining bank and/or non-bank financing.

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H. Changes in prices of oil and petroleum products – The price paid by Delek Israel for the petroleum products it purchases is derived from fuel prices in the free market in the Mediterranean region and is therefore exposed to fluctuations in fuel prices in these markets. The rise in fuel prices around the world brings with it a rise in prices of products sold by Delek Israel, which can lead to a decline in demand for these products, while impairing the profit on every product sold and adversely affecting Delek Israel's business results. The factors influencing fuel prices include changes in the state of the global and local economy, the level of demand for fuel products in the countries in which Delek Israel operates, the political situation in general and of the oil producing areas in particular (USA, the Middle-East, the former Soviet Union countries, West Africa and South America), the production level of crude oil and oil distillates around the world, development and marketing of fuel substitutes, interruptions in the supply lines, and local factors including market and weather conditions. I. The competitive environment – The fuel market is characterized by intense competition, which translates into erosion of margins and increased customer credit. The competitive environment in which Delek Israel operates significantly affects its financial results. J. Additional gas stations – In the past few years, dozens of new gas stations have been set up every year. Continuing this trend will increase competition in the fuel sector. The proposed change to National Outline Plan No. 18 could exacerbate this trend. K. Fuel taxes – The excise element is a significant component of the prices of oil products. Since the credit term Delek Israel receives from its suppliers for payment for the fuel product price (including the excise) is far shorter than the credit term offered to its customers, Delek Israel has financing exposure which will increase with any change in excise rates (including on diesel). This could have a detrimental effect on the business results of Delek Israel. L. Changes in requirements for maintaining civilian inventory – As noted in Section 1.8.19A.1, the High Court of Justice approved an interim arrangement requiring maintenance of emergency security inventory only. However, the State is entitled to change the current situation by giving 60 days' notice whilst ensuring the rights of the parties to revert to the High Court. The significance of maintaining civilian inventories, at whatever level, is on the one hand an increase in the financing cost for Delek Israel and an increase in the volume of credit, and on the other hand the fact that it is liable to lead to increased demand for storage of inventory at Delek Israel's storage and supply depots, which could have a positive impact on Delek Israel's business. Nonetheless, it is noted that such changes might reduce Delek Israel's available capacity for providing storage services at prices that are economically viable for Delek Israel. M. Dependence on infrastructure installations – The fuel industry has limited infrastructure installations (two refineries, a small number of storage and supply facilities) and therefore cessation of operation of an infrastructure installation is likely to harm the proper operation of the refineries and fuel companies. Cessation of operations can be caused by strikes, a security event, accident, natural disaster, etc. Furthermore, damage to the fuel pipeline to Delek Israel's storage and supply facilities could impact Delek Israel's storage and supply operations. Delek Israel believes that due to its fuel storage and supply operations it is exposed over and above the exposure of other fuel companies which have no such infrastructure facilities. N. Regulatory involvement – As noted, Delek Israel is affected by regulatory changes in the fuel economy, including control of the prices of benzene and of storage and supply, as well as restrictions on the purchase price from refineries and regulatory restrictions on contracts relating to gas stations in the field of oil distillates. Regulatory changes in the fuel market could affect the extent of investment required from Delek Israel in its operations and as a result, affect the financial results and profitability of Delek Israel. O. The environment – The provisions of various laws, regulations and orders, as well as requirements of the Ministry for Protection of the Environment concerning gas station, facilities and plans involving environmental protection, require Delek Israel to allocate extensive financial resources to this issue. In recent years there has been a sharp increase in the Ministry's demands, and these are likely to be broadened and to increase in number, which could necessitate Delek Israel making additional financial resources available. Delek Israel intends to continue working to implement statutory provisions and the requirements of the Ministry for Protection of the Environment, and will carry out its land identification and restoration plan as described in section 1.8.18O. P. Exposure to legal proceedings due to environmental pollution – Delek Israel is exposed to legal proceedings, both civil and criminal, due to environmental pollution allegedly caused in the past and liable to be caused in the future as a result of its operations, and within this framework the authorities

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make inspections and investigations from time to time. There is a risk of claims against Delek Israel and its officers if ground and water contamination are found at stations other than those listed in section 1.8.18B. As noted, rehabilitation of the environment of a station where the water has been contaminated can involve significant expenses that cannot be estimated. Q. Lack of insurance cover – Delek Israel's third party insurance policies cover its liability for, inter alia, bodily harm and property damage caused by accidental environmental pollution, up to a limit of liability of US $50 million per occurrence and per insurance period. However, the third party liability limit for professional liability is US $3.75 million. Delek Israel does not have an insurance policy for liabilities that may be imposed as a result of ongoing environmental pollution that is not accidental, such as the pollution as described in Section 1.8.18. R. Hazardous and toxic materials – Since Delek Israel deals in hazardous and toxic materials with potential for explosion, ignition or poisoning, it is exposed to damage that might be caused by these materials, including health damage, environmental damage, damage resulting from the ignition of flammable materials, etc. Claims in respect of these damages are liable to be detrimental to business results and to harm the company’s reputation. Delek Israel purchases insurance policies customary and acceptable in Israel for insuring its assets and liabilities arising from dealing in these materials. There is no certainty that the cover and/or limits of liability in the policies cover all the risks involved in Delek Israel's operations, and there is no certainty of being able to continue these policies in the future on reasonable commercial terms or at all. S. Product liability – Delek Israel markets various refined oil products that are especially sensitive due to them being hazardous materials and due to the manner of their use. A large body of laws and regulations govern the rights of victims or groups of victims who have suffered damage has been caused due to a product manufactured, stored, marketed or sold by a supplier. If any harm is suffered by a consumer or group of consumers as a result of materials marketed by Delek Israel, the company is liable to be sued by those consumers, including in class actions, which could be detrimental to the business and its results. T. Natural gas – The State published a request for bids for a franchise to distribute natural gas in the south of the country. The gas is used for burning and is an alternative to the kerosene, fuel oil and LPG marketed by Delek Israel. Marketing of natural gas broadens the range of alternatives to Delek Israel's products and as a result, could reduce the volume of its sales. U. Development of alternative energy sources – Beyond the use of alternative energy sources such as natural gas, electric engines and the like could affect the quantities of fuel products sold by Delek Israel and compel the company to make a considerable investment in adapting its stations to new requirements of customers, and could also create competition beyond the gas stations. Delek Israel estimates that this process will not materially affect its results in the near future, except in the matter of natural gas as noted above. V. Automotive gas – The transition to automotive gas which will replace gasoline will require Delek Israel to prepare in advance by setting up gas filling points at a cost of hundreds of thousands of shekels per gas filling point integrated into gas stations. It is emphasized that the extent of transition to filling with automotive gas is still unclear, due in part to uncertainty regarding government intentions for taxing the gas (excise) and matching the tax levels to those levied on gasoline. W. Dependence on refineries – As noted in Section 1.8.13B, companies operating in the field of oil distillates are almost completely dependent on the refineries, which are the central and main suppliers of various distillates they purchase. In view of the acquisition of the Pi Glilot storage and supply facilities in late July 2007, Delek Israel is slightly less dependent on the refineries. X. ORL's launch of fuel marketing operations – ORL was granted the option, after its sale, to market fuels directly to consumers and to set up pr acquire gas stations. Y. Economic slowdown in the local economy – A slowdown in the economy brings deterioration in the payment ethic, including for objective reasons of harm to the customers' ability to pay. The industry is characterized by large credit to customers, some with no collateral and some with partial collateral, and a slowdown exposes the companies operating in the field to the possibility that such credit might not be repaid. Additionally, a slowdown on the global and Israeli economy could bring a reduction in private demand and commercial operations and as a result, a decrease in the volume of sales of Delek Israel's products, in its income and in its profitability. Z. Transition to public transport - In recent years there has been a steady increase in the use of the railways, including the “light” railway that will eventually criss-cross the major cities, a fact that

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reduces the use of private vehicles. The more this trend continues, so the amount of gasoline and diesel sold to customers will decrease, a fact that could affect the financial results of Delek Israel. AA. Decision of the Antitrust Tribunal regarding exclusive supply agreements at stations where fuel companies have no proprietary rights – According to a decision of the Antitrust Tribunal on March 25, 2001, exclusive supply agreements can be made for a maximum term of three years for an existing station or six years for a new station which the fuel company has constructed or invested in, in which the fuel companies do not have proprietary rights. This fact increases competition and could cause changes in the deployment of gas stations in Israel. Delek Israel has 44 such agreements. BB. Regulations in the food sector – Food products sold at convenience store chains are subject to many and varied regulations. In the event on on-compliance with these regulations, Delek Israel is could be found liable for damages due to the consumption of spoiled food and for failure to meet the standards and statutory provisions of the competent authorities. CC. Adoption of the proposed Automatic Fueling Device Regulations – In 2007 a proposal was made to promulgate regulations for automatic fueling devices, as described in Section 1.8.19A.8. Delek Israel is unable to assess whether the proposed regulations will be promulgated or not, and if so, when. Delek Israel believes that approval of the automatic fueling device regulations, as currently proposed and if enacted, could mean a material expense (the amount of which cannot currently be estimated), for Delek Israel, for conversion of existing Dalkan devices to universal fueling devices. Furthermore, making fueling devices universal would increase the number of stations at which the customer can purchase fuel products, and therefore could lead to a decline in the number of customers purchasing fuel products using Delek Israel’s automatic fueling array. DD. Increase in the use value of company cars and decrease in the number of cars – On December 31, 2007, the Income Tax (Use value of a vehicle) (Amendment) Regulations, 5767-2007 were published, according to which the use value of a company car will increase over four years from January 1, 2008 through January 1, 2011. At the same time as approval of these regulations, income tax rates on middle level incomes will be reduced, the objective being to partially offset the additional tax that will be paid on the use of the company car. Pursuant to the "green tax" reforms, as at January 2010, the method of calculating the charge for use value of a company car changed from the group price method to a linear method, whereby the use value will be a fixed percentage of the price of the vehicle, thereby canceling in fact the group price with respect to cars registered as of January 1, 2010. 1 These regulations and the adoption of the linear method, if adopted, and the increasing numbers of lay-offs, are liable to impact, in the long term, the number of company vehicles used by employees, which in turn would lead to a decline in fuel consumption. EE. Failure to obtain required approvals and licenses for operating gas stations –The operating of a Delek Israel gas station requires approvals and licenses from various bodies. At some of its stations Delek Israel does not have all the required approvals and licenses, and in some cases these have expired and require renewal. If Delek Israel does not succeed in obtaining these approvals and licenses, this could have a detrimental effect on its operating results. FF. Credit risk – Most of customer credit extended by Delek Israel is not secured by any collateral or guarantees, a fact that exposes it to credit risks. At Dedcember 31, 2009 and December 31, 2008 and December 31, 2007, Delek Israel has trade receivables amounting to NIS 1.444 million and NIS 1.225 million, respectively. At December 31, 2009, more than 95% of the foregoing debts are not secured with collateral or guarantees of any kind. At December 31, 2009, Delek Israel has 10 customers with outstanding debt ranging from NIS 10-25 million and total debt of NIS 167 million; Delek Israel also has five customers with outstanding debt ranging from NIS 25-50 million and total debt of NIS 149 million; and three customers with total debt of between NIS 50 – NIS 91 million and an overall total of NIS 211 million. GG. Default of loans granted to customers – Delek Israel extended loans in the normal course of business to customers who operate stations on behalf of Delek Israel or independent station operators as described in Section 1.8.5A. Delek Israel has collateral for most development loans and commercial loans (which at December 31, 2009 amount to NIS 85 million), whereas for part of debt rescheduling loans, Delek Israel has no collateral (which at December 31, 2009 amount to NIS 79 million). Therefore, Delek Israel is exposed to credit risk for default of uncollateralized loans.

1 It is noted that the linear method was scheduled to come into force at the beginning of 2009; however, it was decided to continue setting use value according to the group price method for a further year.

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HH. Non-renewal of Ionex’s agreement with Haifa and Ashdod ports for marketing fuel products to ships – The agreement with Haifa port was effective through April 30, 2010. Under the agreement, the Ports and Railways Authority has the right to publish a new tender for the supply of fueling services, and in the event that Ionex does not win the tender, it will be required to vacate the port on 60 days' notice. There is no certainty that Ionex would be awarded the new tender to be published by the Ports and Railways Authority. In Ashdod port, Ionex operates under a permit to provide fueling services to vessels, effective through June 15, 2010. It is noted that Delek Israel is currently conducting negotiations with Ashdod Ports to continue leasing the fueloil supply depot which is the basic foundation for obtaining a license for fueling services at Ashdod port. If Ionex does not win these tenders for fueling at sea ports, this could have a materially negative impact on its business. This information is forward-looking information, which might not materialize, inter alia, due to the occurrence of events unforeseen by Delek Israel. II. Ownership structure of gas stations – Due to the ownership structure of gas stations, some of which are rented by Delek Israel and some with which Delek Israel has only a fuel supply contract, there is a risk that these stations will switch to marketing the products of other fuel companies at the end of the rental/supply period. Additionally, at stations that it neither owns nor operates, Delek Israel is subject to greater pressures from operators/owners and the profitability of such stations is therefore eroded. JJ. Short term direct marketing contracts – In of direct marketing the contracts are short term, and as such there is a risk that customers will leave and transfer to competitors at short notice. KK. Lawsuits – There are material lawsuits against Delek Israel, including class actions in amounts that could reach hundreds of millions or even billions of shekels, for some of which it is not possible at this stage to estimate the outcome (see Note 33 to the financial statements). Delek Israel is exposed to the consequences of these claims. LL. Dependence on brand name and goodwill – Delek Israel's goodwill has been earned over many years and a brand name that distinguishes it and its subsidiaries and affiliates from its competitors. Harm to this goodwill or these brands through various publications or other means could have a detrimental affect on Delek Israel even if such publications are incorrect. MM. Environment at Old Stations – Delek Israel has old public gas stations established before 1997, accounting for about 56% of all its stations. These stations were built to standards acceptable in the past and which according to current know-how do not guarantee that there will not be leakage from a tank or pipe. NN. Delek Israel belonging to a Group and to its controlling shareholder, Mr. Yitzchak Teshuva – The fact that Delek Israel belongs to a group and to its controlling shareholder, Mr. Yitzchak Teshuva, has implications for Delek Israel's ability to raise credit, inter alia, due to the "single borrower" restrictions, which could result in its sources of bank credit being limited, and other regulatory regulations imposed on the banking system and on institutional bodies by the Ministry of Finance and the Bank of Israel. Below is a summary of the risk factors described above according to their type (macro risks, industry-wide risks and Delek Israel-specific risk),w rated by extent of their impact on Delek Israel's business (major, medium, minor): Impact of Risk Factors on Delek Israel’s Business Minor Impact Medium Impact Major Impact Macro risks • Security and political • Changes in interest rates situation • CPI changes • Strikes and closures • Difficulties in obtaining • Economic slow-down in finance Israel and worldwide • Changes in foreign exchange rates

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Impact of Risk Factors on Delek Israel’s Business Minor Impact Medium Impact Major Impact Industry-specific • Lack of insurance • Competition • Changes in prices of oil and risks cover • Establishment of additional petroleum products • Product liability service station • Regulatory involvement • Automotive gas • Fuel taxation • Environmental quality • Food sector • Changes in civilian inventory • Dependence upon refineries regulations requirements • Entry of ORL into the fuel • Rise in company car • Dependence upon marketing segment utilization value infrastructure facilities • Economic slowdown on local • Transition to public • Exposure to lawsuits on market transport environmental issues • Antitrust Authority • Hazardous and toxic • Transition to automatic materials fueling facilities • Natural gas • Development of alternative energy sources Delek Israel- • Default of loans granted to • Failure to obtain permits and specific risks customers licenses for stations • Short term contracts in the • Credit risks direct marketing operations • Ownership structure of filling • Dependence on branding stations and goodwill • Lawsuits • Environmental issues at • Delek Israel belonging to the veteran stations Delek Group and its controlling shareholder, Mr. Yitzhak Teshuva • Non renewal of Ionex contracts with ports

The extent of the effect of risk factors on the business of Delek Israel is based on estimates only, and it is possible that in practice, the extent of the effect might be different.

1.9 The Fuel Products Segment in Europe

1.9.1 General In 2007, Delek Benelux BV ("Delek Benelux"), a foreign company incorporated in the Netherlands, a subsidiary of the Company (together with a subsidiary which is incorporated in Luxembourg) acquired the marketing operations of subsidiaries of Chevron Global Energy Inc. ("Chevron") in the Benelux countries (Belgium, Netherlands and Luxembourg), consisting of 803 gas stations under the Texaco brand and 66 stations under private brands ("Benelux Marketing Operations”). Benelux Marketing Operations include convenience stores, food chain stores and carwash facilities, as detailed below. The marketing operations are incorporated as three distinct companies in each of the aforementioned countries. Delek Benelux is a wholly-owned subsidiary of Delek Europe BV, which is wholly owned by Delek Europe Holdings Ltd. (“Delek Europe”), a company incorporated in Israel and held by the Company (80%) and Delek (20%).

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Approx 87.4 % Delek the Israel Fuel Corporation The Company

20% 80%

Delek Europe Holdings Ltd .

100%

DelekDelek Europe Europe BVBV

100%

Delek Luxembourg Delek Benelux BV Holdings 100%

100% 100% 100%

Delek Delek Delek Luxembourg Belgium Netherlands

The proceeds of the acquisition amounted to EUR404 million, after working capital adjustments. The acquisition was financed by foreign bank financing raised by Delek Benelux and its subsidiaries, as well as by an equity investment in Delek Benelux, the proportion being 63% bank financing and 37% shareholders' equity, invested in Delek Benelux upon closure of the transaction. The three acquired companies included other operations in the past, which Chevron removed from the companies' operations prior to their acquisition. In view of the above, past data provided to Delek Benelux for the three acquired companies included other operations, and the data appearing below, referring only to Benelux Marketing Operations on July 31, 2007 are unaudited, proforma data, based on the data submitted to Delek Benelux. In 2010, after the reporting period, Delek Europe made a binding offer to acquire BP’s marketing operations in France as described in section 1.9.29. 1.9.2 Financial information regarding the Benelux marketing operation Below are data regarding the segment of operations in 2007-2009 (in EUR millions):

2007 2008 2009 Revenues 1,826 2,776 1,952 Cost of revenues 1,646 2,553 1,722 Gross profit 181 223 230 Operating profit 19 10* 20* Percentage of operating profit out of total gross 11.5% 4.5%* 8.7%* profit **

* After elimination of onetime expenses which will include relocating Delek Benelux's offices from their current location in Rotterdam and Brussels to a single office in Breda, Netherlands (see Section 1.9.18), operating profit in 2008 was approximately EUR23 million, which constitutes 10.3% of total gross profit and in 2009 approximately EUR24 million which constitutes 10.4% gross profit. Most of the above expense is compensation payments to employees whose employment was terminated due to the relocation. Operating profit includes the Company's share in the operations of the investees. ** Because of the volatility of fuel prices and its effect on Delek Benelux's income, it is customary to calculate the percentage of operating profit out of total gross profit. 1.9.3 Structure of the segment of operation and changes therein

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At the reporting date (December 31, 2009), the operations of Delek Benelux include some 852 gas stations of which 717 are Texaco branded gas stations – 439 in the Netherlands, 264 in Belgium and 14 in Luxembourg. Operations also include about 135 non-Texaco branded gas stations.

The marketing operations are carried out through several distribution channels:

A. Gas stations owned or leased for the long-term and operated by Delek Benelux (Company- Owned Company-Operated – COCO). B. Gas stations owned or leased for the long-term by Delek Benelux and operated by third parties (Company-Owned, Retailer-Operated – CORO). C. Gas stations owned or leased and operated by third parties, to which Delek Benelux supplies fuel on an exclusive basis (Retailer-Owned, Retailer-Operated – RORO). D. Holdings ranging between 40%-50% in joint ventures: three independently-operated companies that market fuel (retail and commercial) – equity distributors. E. Authorized distributors – supplying Delek Benelux fuel to 17 stations in Belgium which independently sell fuel to small-medium enterprises, residential customers and service stations. In addition, the European fuel operations include 621 convenience stores and 69 bakeries. As well as the convenience stores, the operation also includes 183 car-wash facilities and five roadside restaurants. In 2010, two important motorway sites and two roadside restaurants will be included in the Belgian operation. For further details, see Sections 1.9.11 and 1.9.16. 1.9.4 Restrictions, legislation, standardization and special constraints Delek Benelux operations are subject to various regulatory restrictions and requirements, including environmental protection requirements, labor laws, regulations for the sale of alcohol and tobacco products, minimum wage, labor conditions, public access roads and other legislation. For further details, see Sections 6.10.23 and 6.10.24.

1.9.5 Changes in the scope of operations in the segment and its profitability A. The fuel station and convenience store market in the Benelux countries is relatively centralized and stable. Each of the countries has five or six major players, of which Delek Benelux is one. B. To the best of Delek Benelux management's knowledge, in 2009 fuel consumption in the Benelux countries declined by 3% compared with 2008 after there had been a slight upward trend in previous years when it rose from 18.8 billion liters in 2004 to 20 billion liters in 2008. The decline stems primarily from the global economic crisis which affects overland transportation, a very significant component in fuel consumption in the Benelux countries. In 2007 and 2008, sales of diesel accounted for 59% and 60%, respectively, and sales of gasoline accounted for 41% and 40%, respectively. Demand for diesel has increased in recent years, while demand for gasoline is declining due to a decrease in the number of gasoline- powered vehicles in the market. This trend was halted in 2009 because of the reasons listed above. Fuel consumption depends on factors such as growth rates, fuel taxation policy, growth in the number of cars in the Benelux countries and the extent of their use. C. As a result of the global crisis and its implications for commodity traffic, in the fourth quarter of 2008 there was a significant slowdown in the demand for fuel. This slowdown continued in 2009. Delek Benelux cannot estimate its duration and/or its scope but it is likely to continue and have an adverse effect on its operating results and expand to affect convenience stores sales. D. Fuel prices are materially affected by crude oil prices which are subject to significant fluctuations on global markets. The gross margin per liter of fuel in the acquired operations has remained relatively stable over recent years due to the market structure and the competitive environment. E. The convenience store market in the Benelux countries has grown in recent years at an annual rate of 4%-5%. This is because the restrictions on the permitted business hours of these stores were relaxed at the end of the 90s and the regulatory regime governing the stores’ product ranges is liberal. 1.9.6 Developments in markets of the segment of operation or changes to its customer profile A. The Netherlands: Demand for fuel in this country grew steadily in 2000-2008 at a rate of over 2%, due to higher GDP and an increased demand for transportation. It is noted that the

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demand for diesel has grown at a faster pace, while demand for gasoline has declined due to a decrease in the number of vehicles powered by gasoline. The global financial crisis of 2009 cause a general decrease in demand for fuel of approximately 3%, most of which is attributed to the decrease in demand for diesel. B. Belgium: In 2003 – 2008 there was an annual increase of 2% in demand for fuel. Belgium serves as a pipeline for the transfer of goods to and from the ports of Rotterdam and Antwerp. As a result of the global crisis, this trend was halted in the fourth quarter of 2008, and in 2009 the market even fell by 1%. C. Luxembourg: The fuel market in this country is characterized by high demand, mainly due to low fuel tax compared with its neighbors (which leads to fuel consumption in Luxembourg by customers from neighboring countries – "fuel tourism") and due to Luxembourg's geographic location. In the first three quarters of 2008 there was no significant change in the total demand for fuels. As a result of the global crisis, in the fourth quarter of 2008 there was a significant drop in demand for fuels in general and diesel in particular because of the decrease in truck traffic along the motorways. This trend continued in the first quarters of 2009 when the decline totaled 7%, most of which is attributed to the decline in diesel consumption. 1.9.7 Critical success factors in the segment of operation and changes therein Delek Benelux believes that the critical success factors in the segment include the following:

A. Widespread deployment and attractive locations of gas stations. The transition of more profitable gas stations to ownership or long-term leasing and operation by Delek Benelux (COCO) and reduction of holdings in less profitable gas stations. B. Financial stability that allows, inter alia, investment in setting up new company-owned stations and in renovation and expansion of existing stations C. Advanced retail strategy management, including investment in the development of the chain’s convenience stores in order to produce value for customers (service/quality versus price). D. Advanced information technology and decision-support systems; creation of support for critical business processes. E. Ownership rights in the land on which the gas stations are built. F. Contracting terms with station operators. G. Development of Texaco fuel cards, availability of fuel and other products and the means to store them. H. Advanced marketing and logistics systems. I. A network operating under the international Texaco brand that has been well-established in the Benelux countries for over 100 years. J. The economic situation which affects, inter alia, the volume of fuel consumption and purchases at convenience stores as well as the prices of the products sold. 1.9.8 Changes in suppliers and raw materials A. Fuel product suppliers In the Netherlands and Belgium, there is a relatively large number of refineries centered around Rotterdam and Antwerp that are able to supply fuel products. Fuel products are purchased by Delek Benelux from the Nerefco refinery, owned by BP, from the Total refinery, from the Shell refinery and from other companies, inter alia under swap agreements. There are also storage and trading supply contracts with international companies For details, see section 1.9.19. B. Convenience store product suppliers There is a wide variety of convenience store product suppliers in the Benelux region. Delek Benelux has contracts with various suppliers for the purchase of tobacco products, soft drinks and alcoholic beverages.

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1.9.9 Entry and exit barriers A. The following material entry barriers are typical of the Benelux market: 1. Size of current players: The various Benelux markets have few companies, each with a market share in excess of 10%. New competitors therefore find it difficult to enter the market other than by means of acquiring an existing player. 2. Significant investments requiring considerable capital: Investment in gas stations requires considerable capital, for various reasons, including the price of land (due, inter alia, to limited availability of suitable free land) and the cost of acquisition or construction of gas stations. 3. Environmental protection and planning regulation: Strict standards by environmental protection and planning authorities limit entry into the market or increase the associated costs. 4. Limited availability of available suitable land for the segment of operation (primarily along motorways) leads to higher land prices and deters the entry of competitors interested in expanding gas station compounds into major shopping areas (hypermarkets). 5. Furthermore, the Netherlands and Belgium require a tender process for operating gas stations on motorway sites, which increases prices at such locations to levels only affordable by the major players. B. The major exit barriers are the existence of rent/lease/operating contracts with land/station owners. 1.9.10 Structure of competition in the market A. Delek Benelux operates in markets in the Benelux countries alongside other major companies. The fuel market in these countries is relatively concentrated, with five or six major fuel companies holding 80% to 90% of the market. B. It is estimated that the five major fuel marketing companies in the Netherlands comprise 80% of the market. The three companies with the largest market share are Shell, BP and Delek Benelux (Texaco). C. It is estimated that the six major fuel marketing companies in Belgium comprise 80% of the market. The three companies with the largest market share include Total, Q8 and Shell. Delek Benelux (Texaco) has the fifth largest market share in Belgium. D. It is estimated that the six major fuel marketing companies in Luxembourg comprise 90% of the market. The company with the largest market share is BP, followed by Shell, Exxon and Total with similar market shares. Delek Benelux (Texaco) has the sixth largest market share in Luxembourg. E. Competition in the fuel market is focused on gaining an advantage in the deployment of gas stations, branding gas stations to attract customers (gas stations of Benelux Marketing Operations are branded Texaco, which has been considered a well-established international brand for 100 years) and the expansion into additional services provided within gas station compounds (convenience stores, car wash services, restaurants, etc.). 1.9.11 Products and services A. Fuel and oil products Diesel: Mainly for diesel-powered vehicles, as well as for heating and industrial use. Marketed both at gas stations and to industrial customers through joint ventures and independent distributors. Diesel sales comprise 75% of total fuel sales. Various types of gasoline: For vehicles with gasoline engines and marketed mainly at gas stations. Gasoline sales comprise 20% of total fuel sales. There are no significant differences in profits from the sale of diesel and the sale of gasoline, with the exception of minor differences between countries. Premium fuels: In 2007, Delek Benelux began marketing a premium fuel under the XL brand name in the Netherlands. The main objectives in marketing XL were to supply a new product meeting customer expectations and to penetrate the premium fuel market which offers greater profits.

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B. Convenience store products Delek Benelux sells various retail products at its convenience stores, including food products (such as sandwiches, baked goods, and snacks), various beverages, cigarettes, car maintenance products, basic hygiene products and other products. At the reporting date, there are 6,21 convenience stores of which 592 are branded convenience stores operating under the names Star Mart or Star Market. As part of its strategic plan the Company decided to develop a new concept for the operation of its convenience stores in order to increase its revenues and profit margin, giving them makeovers and increasing their visibility while emphasizing roadside freshness, reinvigoration and convenience on the road. Delek Benelux is offering a range of products suited to the needs of customers in their stores. The new concept has been given the brand name “GO – The Fresh Way”. In 2009 Delek Benelux carried out a successful pilot in three gas stations and subsequently expanded the concept in another nine stores. It intends to convert additional stores in 2010, making substantial cost reductions and increasing profit margins. It is planning to convert all its stores to the house brand in all its operations, including distributors and franchisees. All aspects of the chain are managed by Delek Benelux’s in- house staff who are working to refresh the buying experience and improve overall service. C. Bakeries The chain has 69 bakeries operating under the “store within a store” concept. Until earlier this year the bakeries were Baker Street franchise stores. In August 2009 Delek Benelux’s franchise to operate branches under this brand name in gas stations expired. The Company opted not to extend it but to replace it with bakeries operating in the format developed for its new concept of convenience stores under the house brand “GO – The Fresh Way”. In the last quarter of 2009 Delek Benelux proceeded to convert all the Baker Street chain in its own convenience stores in the Netherlands and Belgium to GO – The Fresh Way bakeries. The chain sells fresh fast food such as bakery products and salads which are often prepared on site. The Go Bakery chain operates primarily in the Netherlands. Car wash facilities There are 183 car-wash facilities in gas station compounds. D. Restaurants and hotel In the past year Delek Benelux has expanded its operation in motorway gas stations in Belgium and has begun to operate four restaurants and one hotel. E. Below is a breakdown of the convenience stores, car wash facilities and Go Bakery outlets by country and site type:

Convenience Car wash Country Site type1 stores facilities Go bakeries (COCO) 108 43 121 Netherlands CORO/RORO 148 66 11 Partnerships and 91 44 3 distributors Belgium (COCO) 31 2 13 CORO/RORO 211 26 17 (COCO) 10 1 2 Luxembourg CORO/RORO 4 0 2

1 In the COCO sites the Company bears the full costs of operating the convenience stores, car wash facilities and bakery outlets and it enjoys full profitability. In the CORO and RORO sites a third party operates the convenience stores, car wash facilities and bakery outlets. In the CORO sites the Company is entitled to payment in accordance with a rental agreement with the third party for use of the site’s facilities, which is based on a fixed payment and a variable payment deriving in some cases from the sales turnover on the premises.

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1.9.12 Segmentation of revenues and profitability: products and services Below are the amounts and shares of revenues from fuel sales and from convenience stores, bakery outlets and car wash facilities (“Convenience Stores and Others") for Benelux Marketing Operations in 2008-2009:

2009 2008 EUR Segment EUR Segment millions revenues (%) millions revenues (%) Fuel 1,718 88.02% 2,562 92.29% Convenience stores 232 11.89% 213 7.67% Others 2 0.09% 1 0.04% Total 1,952 100% 2,776 100%

Below are the amounts and gross margins from fuel sales and from convenience stores and others for Benelux Marketing Operations in 2009-2008:

2009 2008 EUR Segment EUR Segment millions revenues (%) millions revenues (%) Fuel 161 9.4% 160 6.3%

Convenience stores and others 67 28.9% 62 29.2% Others 2 100% 1 100% Total 230 11.8% 223 8.0%

The main decrease in sales in 2009 stems from a fall in fuel prices and the general decline in the fuel market during the year. It is noted that there are considerable differences in the sales of the different gas stations. For example, Delek Benelux gas stations include 42 motorway sites, with a large volume of vehicle traffic using their services. The sales volume at such sites may reach dozens of millions of liters annually, compared with 1-2 million liters annually at small, non-central stations. One of Delek Benelux COCO stations is the Capellen station in Luxembourg. This is one of Europe's top-selling gas stations, and accounts for most of Delek Benelux fuel sales in Luxembourg. 1.9.13 Customers Delek Benelux customers in the gas station segment in Europe are divided into several major groups: Private customers: Customers who buy fuel at Delek Benelux COCO stations and pay the set price for fuel products at each station. In addition, private customers also purchase accessories, food or other products at the convenience stores operated by Delek Benelux, as well as food at Go Bakery outlets and car wash services at facilities within the station compound. Payment is usually in cash or by credit card. At gas stations operated by Delek Benelux, the sale prices of fuel products for the end customer are set by Delek Benelux. Customers that are station operators: CORO and RORO station operators, whose contracting terms are anchored in individual agreements with each of them, pay by bank transfer to the Delek Benelux account, with an average of 7 days' credit. These customers also include the following: Customers that are joint ventures: The joint ventures in which Delek Benelux holds 40%-50% are another class of customers that purchase fuel from Delek Benelux. These customers enjoy an average of 20 days' credit. Customers from industrial and commercial sectors / authorized dealers: Delek Benelux provides fuel to customers from industrial and commercial sectors, not through the gas stations, subject to contracts with them. These customers are granted average credit of 40 days. Gross profit from sales to private customers and station operators in 2008-2009 accounted for 90% of total gross profit of the fuel marketing operations.

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Fuel card customers: Companies and businesses that enter into an agreement with Delek Benelux to purchase fuel at Benelux gas stations using fuel cards issued by Delek Benelux. These customers have average credit of 14 days. In addition, Delek Benelux is party to agreements with specialist companies that issue their own fuel cards and market them to international carrier companies. Average credit for these customers is 30 days. 1.9.14 Marketing and distribution Marketing in gas stations: Delek Benelux promotes its products and services in a number of ways: regional campaigns, discounts at specific gas stations, and sales promotions. In addition, Delek Benelux advertises from time to time in the various media. In 2008 and 2009, Delek Benelux sponsored the first soccer division in the Netherlands and makes extensive use of this in its marketing operations. Agreements to purchase brand fuels: Fuel products sold in the gas stations are marketed under the Texaco brand. For details, see section 1.9.17. 1.9.15 Seasonality In general, Delek Benelux is not affected by any significant seasonality in the segment of operation but bad weather conditions in winter are liable to affect its turnover. 1.9.16 Property, plant and equipment A. The table below shows the breakdown of gas stations by type and Delek Benelux ownership rights at December, 2009:

No. of No. of No. of No. of Delek Delek joint authorized Benelux Benelux No. of venture distributor COCO CORO RORO stations stations Total Country stations stations stations (ED) (AD) stations Netherlands 211 54 122 162 25 573 Belgium 31 127 89 -- 17 264 Luxembourg 10 3 1 -- -- 15 Total 252 184 212 162 42 852 No. of owned stations 29 50 ------Number of stations with remaining rental period 79 19 ------of less than 3 years Number of stations with remaining rental period 86 29 ------of 3-10 years Number of stations with remaining rental period 57 86 ------of more than 10 years

COCO stations are owned or leased for the long term and operated by Delek Benelux. The long-term leases of these stations average between 15 and 25 years, and the renewal dates are spread equally over the years. Delek Benelux owns the inventories at these stations and has direct control over pricing, supply, management and maintenance. Therefore, Delek Benelux benefits fully from station profits since it both owns and operates them. CORO stations are owned or leased for the long term by Delek Benelux and are operated by third parties. The long-term leases of these stations average 20 years and the renewal dates are spread equally over the years. At these stations, all marketing operations of fuel products and the retail and other operations are by the third party operator. The operator signs a lease with Delek Benelux for the use of the compound's facilities and pays for products supplied and for use of the brands. Delek Benelux receives a percentage of the sales in the stores and facilities (but not of the sale of fuels). CORO Plus stations In 2009, with the aim of improving its position, Delek Benelux began using a new type of operating structure called CORO Plus. Existing compounds operating under the CORO

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system were transferred to this kind of operation. The CORO Plus business model is designed to optimize the existing CORO revenue model and revenues for retailers such as Delek Benelux. The CORO Plus method allows Delek to provide full support for sales, purchasing power, training, supply, marketing and trade. This approach gives the retailer an opportunity to focus on operations, improve customer service and maximize turnover. At the end of 2009 40 sites were using the CORO Plus model, primarily in Belgium. By the end of 2010 more than 80 stations in the Benelux countries will be using this method. RORO stations are owned or leased and operated by third parties. At these stations, the third party conducts all the marketing operations of fuel products and retail and other operations. Delek Benelux enters into exclusive agreements with the stations for the supply of fuel and is not entitled to rent or profits. RORO stations are therefore less profitable for Delek Benelux. These exclusive agreements are limited to a maximum term of five years in view of antitrust laws. Joint ventures in which Delek Benelux owns 40%-50% of the rights are companies that operate independently in the fuel sector. Joint venture operations are not consolidated in the financial statements. The authorized distributors are mainly for supplying Delek Benelux fuel to 16 stations in Belgium and for the independent sale of fuel to small-medium enterprises, residential customers and service stations. In the Netherlands Van der Sluijs operates a network of 25 compounds under the Texaco brand for which it pays Delek Benelux licensing fees to use the brand in each compound. B. Delek Benelux has buildings and equipment at most stations in which it has ownership rights. These buildings and equipment form part of Delek Benelux's property, plant and equipment. In addition, Delek Benelux owns equipment in all stations in which it has no ownership rights or in which it has short-term lease contracts. In some of these stations, Delek Benelux also has property, plant and equipment in station buildings that were constructed many years ago, when the seller had ownership rights (including long-term lease contracts) in those stations. Delek Benelux's equipment in its stations includes all required equipment for station operation – tanks, pipes, pumps, computer and communications systems, office equipment, power supply systems and power generators if required, fire extinguishing systems and public restrooms. In 2010, material investments of about EUR 17 million are expected in property, plant and equipment, primarily a planned investment in the new store concept and another investment in a project for the processing of fuel cards. Other expected material investments are for purchasing rights to operate stations along motorways in the Netherlands and Belgium and for upgrading the convenience stores at the stations. The information concerning anticipated investment costs is forward-looking information, and could change along with any changes in the investment plans, additional regulatory requirements including various authorizations, or a currently unforeseen need to upgrade property, plant and equipment and so forth. At the report publication date, Delek Netherlands has holdings of 40%-50% in three joint ventures operating independently in the retail and commercial marketing of fuel (equity distributors). In January, February and September 2008, Delek Benelux completed the purchase of the partners’ shares in three other joint ventures (DGV BV, Schreurs BV and Salland Olie Maatschapp B.V.) and became the sole shareholder (100%) of these companies. The consideration for the partners’ shares amounted to EUR 50 million and was financed from independent sources. Delek Benelux also owns three joint ventures that include 162 gas stations. The results of the joint ventures were not consolidated in the operating results of Delek Netherlands, and the contribution from their fuel sales is not material for the segment of operation. However, the joint ventures are important in Delek Benelux's view, since they expand the presence of its Texaco brand and provide a wide customer base for the fuel card program. 1.9.17 Intangible assets On August 8, 2007, Delek Benelux entered into a contract with companies of the Chevron Group ("the License Holders") for obtaining a license to use the Texaco trademark and additional trademarks (primarily Star Market and Star Mart) in the Benelux countries. The Texaco trademark with the star (Texaco Star) is one of the best known trademarks in the fuel world, and has been in use in the Benelux countries for many years. Pursuant to the contract, Delek Benelux was granted a non-exclusive license to use the trademarks in the Benelux countries, with no royalty payments,

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for seven years commencing August 8, 2007. The contract includes guidelines on how to use the trademark terms to ensure proper use of the trademarks, as well as control and supervision mechanisms by the License Holders. Delek Benelux has the right to sub-license during the first six years of the term of the license. Delek Benelux has committed to rebrand all stations no later than three months prior to the end of the license term, and if it fails to do so, it will be liable for penalties prescribed in the contract. The contract includes provisions whereby the License Holders may terminate the contract at short notice due to a material breach which Delek Benelux fails to remedy. At the reporting date, Delek Benelux is in compliance with the terms of the license. As part of the joint acquisition with Salland Olie Maatschappij BV in September 2008, Delek Benelux received ownership of the Firezone brand which is used in the operation of unmanned stations of the above partnership. 1.9.18 Human resources A. After closing the transaction, Delek Benelux operates in six major divisions. The managers of these divisions are members of the Delek Benelux management and report directly to the CEO of Delek Benelux. The divisions are station sales, commercial operations, logistics operations, finance, human resources and information technology (IT). There are also departments that report to the CEO B. Below are details of the Delek Benelux payroll at December 31, 2009:

Department No. of employees Delek Belgium 47 Delek Luxembourg 8 Delek Netherlands 151 Total company headquarters 206 DGV 35 Salland 53 Schreurs 25 Total subsidiaries 113 COCO stations in Belgium 261 COCO stations in Luxembourg 92 COCO stations in the Netherlands* 701 Total COCO gas stations 1,054 Grand total 1,373 * Includes COCO stations of DGV, Schreurs and Salland In 2009 employee numbers changed following the merger of two of Delek Benelux’s offices, in Rotterdam and Brussels, which were merged into one headquarters in the city of Breda which is on the Dutch side of the Netherlands-Belgium border. In the same year operational outsourcing agreements such as maintenance and distribution planning came to an end and were transferred to Delek Benelux departments. These investments will lead to savings in operating expenses and an improvement in work quality. Investments to increase the sales staff for fuel cards and proactive sales in the small-medium (SME) business segment will add commercial turnover from Delek Benelux customers. An additional optimization in COCO/CORO/RORO operating structures in the Benelux countries, primarily as a result of the conversion of CORO/RORO sites to COCO sites, has led to a significant increase in the number of COCO station employees. C. In the Benelux countries, labor relations are governed by extensive legislation with which Delek Benelux complies. Collective labor agreements apply to most of the employees who are represented by unions and benefit from medical insurance, including disability insurance, seniority and retirement bonuses. D. Mr. Hod Gibso, CEO of Delek Europe, was granted, free of charge, options to purchase shares constituting 2.5% of Delek Europe’s share capital which are exercisable in six portions in the exercise period beginning on the grant date (June 1, 2008) and ending in 2012 (at the balance sheet date there remained four entitlement dates: June 1, 2009, June 1, 2010, June 1, 2011 and June 1, 2012). Exercise is possible from any date on which the exercise right exists until the end of the exercise period or until 90 days after Mr. Gibso leaves the company,

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the earlier of the two. The exercise price will be based on a company value of Delek Europe of EUR 129 million (EUR 4,300 per share) for the first portion, and thereafter the price will contain an annual addition of 5% from portion to portion. If Delek Europe, Delek Benelux or Delek Europe BV or another company associated with Delek Benelux’s operations issues shares on any stock exchange, Mr. Gibso will be entitled to convert the shares allotted to him into shares of the issuing company while retaining the benefit component. If Delek Europe is a private company when Mr. Gibso ends his employment there, then in respect of the options exercised for shares Delek Europe will purchase the shares at the exercise price plus the difference between that price and a share price based on an external valuation, and in respect of options which have not been exercised but are exercisable, Delek Europe will purchase them at the above company value, offset against the exercise price. If Delek Europe is a public company, blocking provisions and a right of first refusal will apply to the underlying shares. Mr. Gibso may receive a non-recourse loan from Delek Europe (CPI-linked plus 4% annual interest) in order to finance the exercise. Mr. Zion Ginat, CEO of Delek Benelux, was granted, free of charge, 45,000 options exercisable into Delek Benelux shares, which at the date of their issue constituted 2.5% of the issued and paid-up share capital of Delek Benelux. These options were granted and issued to Mr Ginat in unequal installments, as follows: on April 30, 2008 – 11,250 options, and on each of October 31, 2008, April 30, 2009, October 31, 2009, April 30, 2010, October 31, 2010 and April 30, 2011 – 5,625 options. The options are exercisable subject to their grant date, from the date of their allotment until October 31, 2011 or until 90 days from the date of termination of the consultancy agreement and the end of the Notice Period (“the End of the Exercise Period”). The exercise price for each share is based on a Delek Benelux value of EUR 129 million for the first portion, and thereafter, the exercise price of each additional portion will be the price of the first portion plus 5% annual interest which will accrue until the relevant purchase date. As long as Delek Benelux is a private company and Mr Ginat holds shares, the options may not be sold to a third party. If Delek Benelux or Delek Europe or Delek Europe Holdings or another company from the Delek Group operating in the Benelux countries implements an issue in any market, Mr Ginat will be entitled to convert the shares allotted to him as aforesaid into shares of the issuing company in such a way that the benefit component deriving from the shares is preserved. Upon termination of the consultancy agreement for any reason whatsoever and conclusion of the Notice Period ("the Final Date”), if Delek Benelux is a private company it will purchase all the options which have not been exercised and which could have been exercised by the Final Date "(“the Exercisable Options”) and all the shares held by Mr Ginat as set forth in the agreement. If Delek Benelux is a public company, the shares underlying the exercise will be blocked for the period required for compliance with the provisions of the relevant legislation, and thereafter they may be sold subject to a right of first refusal of Delek Benelux as set forth in the agreement. In order to exercise the options, Mr Ginat will be entitled to a loan bearing 5% annual interest, secured only by a non-recourse lien on the shares. 1.9.19 Raw materials and suppliers In general, the Benelux market has excess refinery production capacity reflected in fuel supply that exceeds local demand. Therefore, local refineries export to other EU countries and to North America. In the Netherlands, most fuel products are supplied by the BP-owned Nerefco refinery. Most of this supply is delivered at the Pernis terminal, adjacent to the Nerefco refinery. In addition, supply is received from other terminals owned by a third party. Supply not purchased from BP is purchased from Shell and Vitol. Most of the fuel in Belgium is supplied from the Total refinery and its production plants. In Luxembourg, most fuel products are supplied from a terminal in Belgium jointly owned by Delek Benelux and Q8. As part of the agreement to acquire the Benelux marketing operation, a supply agreement was signed by Delek Benelux and Nerefco which contains an option for Delek Benelux to extend the agreement for one additional year by mutual consent of the parties to be given no later than September 30 of each year. In 2008 and also in 2009, the Company exercised the option for part of the possible supply. Secondary supply, from the terminal or depot to the gas stations, is mostly by road tankers operated through a transportation company owned by a third party.

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1.9.20 Working capital A. Finished goods inventory policy Average inventory days for Delek Benelux is five days for fuel products. The carrying value of inventories for Delek Benelux at December 31, 2009 was approximately EUR 46 million. B. Credit policy Customer credit: see section 1.9.13. Supplier credit: The average credit period, including the credit period pursuant to the supply agreement with Nerefco, Total and Shell, ranges from 5-20 days. 1.9.21 Investments For details of the Delek Benelux holdings in joint ventures, see section 1.9.3. 1.9.22 Financing Close to the closing date for acquisition of the Benelux marketing operation, Delek Benelux signed a financing agreement to obtain loans of various kinds for the operation. Credit facilities for the future, financial covenants and other conditions were determined and they bind Delek Benelux under the financing agreement. For financing purchase of the shares, Delek Benelux obtained loans amounting to EUR 240 million (first and second lien facilities), a revolver credit facility of EUR 50 million, and a letter of credit facility. The loan agreements require compliance with covenants relating primarily to the ratio of outstanding loans to EBITDA (as defined in the agreement), variable ratios depending on the different periods throughout the lifetime of the loan, ratios of EBITDA to financing expenses throughout the loan periods and compliance with a maximum threshold of Capex investments. Delek Benelux is in compliance with all these covenants. ∗ Credit at variable interest, if constituting 5% or more of total assets:

Principal Variance repayment Interest rate at Loan / facility mechanism date / facility Interest completion amount Type of loan Euribor+ term payment date (EUR millions) First lien facilities1 3.25% In one Monthly (from 7.05%-8.71% 245 installment at 28/09/09) the end of 8-9 year-terms (2015-2016) Second lien 5.125% In one Monthly (from 10.038% 40 facilities installment 2009) after 9.5 years (by 2017) Revolver credit 2.00% 7 years Monthly (from 6.23% 50 facility2 (by 2015) 2009)

In addition, Delek Benelux received a letter of credit facility of EUR 60 million for 8 years. The interest for this facility is not affected by utilization, and is fixed at 2.75%. Following exercise of the option to increase the first lien by EUR 45 million in 2008, this credit facility was reduced to EUR15 million. At December 31, 2008, it is impossible to draw on the letter of credit facility plus EUR 5 million from the revolver credit facility owing to the collapse of Lehman Brothers which served as underwriter and syndication agent and was replaced on September 25, 2008. At the date of this report, Delek Benelux has obtained alternative facilities in a larger amount and on better terms. Furthermore, Delek Benelux attempts from time to time to obtain credit facilities from local banks in accordance with its needs and as appropriate.

1 Priority repayment loan as opposed to the second lien facilities. 2 A credit facility for providing current working capital from which the Company may withdraw amounts according to its needs and at its own discretion.

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1.9.23 Taxation The tax reports of Delek Benelux (a Dutch company) will be consolidated for tax purposes with those of its Dutch subsidiaries in which it holds 95% or more. The future tax liability will be determined based on the value of Delek Benelux's assets, volume of operations and equity. In general, the Dutch corporate tax rate in 2009 is 25.5%. Companies operating in Belgium and Luxembourg are taxed at the applicable rates in those countries. In 2009, the tax rate in Belgium was 33.99% and in Luxembourg was 29.63%. Taxes on capital gains, interest and dividends are affected by the tax treaty between Israel and the Netherlands. Under this treaty for prevention of double taxation, a dividend distributed by a Dutch company to an Israeli company holding at least 25% of its share capital is subject to a 5% tax withholding in the Netherlands. For further details of taxation, including business losses carried forward, see Note 42 to the financial statements. 1.9.24 Environment Delek Benelux is subject to various directives relating to environmental protection, including fuel handling, prevention of soil and water pollution, and waste treatment. In the 1990s, environmental protection requirements for gas stations in the Benelux countries were made more stringent. This raised the level of environmental protection at existing stations, and also created an entry barrier to the establishment of new gas stations. Environmental protection requirements vary from country to country: In the Netherlands, fuel station operators require a license under the Dutch Environmental Control Act and must comply with its terms. Furthermore, station operators must comply with requirements laid down in numerous orders, including a duty to analyze soil quality at specified intervals, to remedy any pollution caused in the period when the station operated under license, and to obtain a special license if any activity other than fuel sales takes place at the fuel station and which has environmental protection implications (such as above-ground fuel tank storage). The Dutch Provincial Executive is authorized to order soil pollution tests and to take action. The obligations can be imposed on owners as well as on the lease-holders of the compound, and may apply to Delek Benelux, primarily with regard to COCO or CORO stations. In Belgium, environmental protection requirements vary according to the exact location of each station, since the country is divided into three regions with different regulatory requirements. Each region has a separate authority for issues relating to environmental protection, including licensing and pollution. The state remains responsible for certain matters involving health and safety. Fuel station operators must obtain an environmental protection license which includes operating conditions, quality-related conditions and conditions related to the upgrading of station equipment. In addition, various requirements are imposed on the operator for matters of cleanliness and testing for soil pollution, which apply both to the operator and to whoever holds rights in the station. In Luxembourg, fuel station operation requires a license from the Ministry of Labor and Ministry of Environmental Protection. Licenses are granted to operators for a limited term (usually 15 years). In general, a station operator is not required to deal with any defects unless the license expires or is revoked, or if any environmental damage is caused during the term of the license. Total costs incurred and investments for environmental matters in 2009 amounted to EUR 2 million compared with EUR 3 million in 2008. The estimated total for these items in 2010 is expected to be approximately EUR 3 million. This information concerning Delek Benelux's assessment of the need for additional investments in environment-related items is forward-looking information. It is possible that it will not materialize, inter alia in the event that significant deviations are found in Delek Benelux operations or that new regulations requiring additional significant expenditures come into force. 1.9.25 Restrictions and supervision of company operation Delek Benelux operations are subject to laws and regulations including, among others, labor laws, regulations for the sale of alcohol and tobacco products, minimum wage, work conditions, public access roads and additional laws, including these: A. Storage obligation: Each Benelux country is committed to comply with a Compulsory Storage Obligation (CSO) for fuel, based on the volume of sales in the preceding year. In previous years, the storage obligation was significantly higher than required, due to the seller's ties with Nerefco and the seller’s marketing operations in other sectors. Historically, the obligation was for 90 days' storage in Belgium and Luxembourg, and 15 days' storage in the Netherlands. The Belgian government established a separate agency for managing fuel obligation requirements. Payment is per liter to the government agency and is almost completely returned by the margin. The government agency covers 75 days of the required obligation,

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and Delek Benelux is required to make up a quota of 12 storage days in 2009, which will be reduced by three storage days every year. It is noted that companies that do not meet storage obligation requirements may purchase "tickets" from other entities in the fuel industry that have inventory balances. The annual costs involved in meeting the storage obligation are not material. B. Provisions to promote competition: In June 2006, a law was enacted in the Netherlands which requires a tender process for obtaining fuel station franchises along Dutch motorways. The law aims to increase the number of players in the market. This trend is also evident in agreements (unrelated to this law) signed between the Dutch government and the four largest fuel industry companies (including Texaco) in 2001, whereby the number of motorway stations belonging to these companies would be reduced by 50. Each of the companies is required to sell a number of motorway gas stations in a tender process. The number of stations for sale is based on market share in the Netherlands, and a tender is held every fifteen years. The process led to the publication of a list of all the sites held by all the companies and the date on which they were tendered. The list is for fifteen years from the date of its publication, so that in each year there is a tender in which stations whose identity is known in advance are offered. The tender mechanism contains a concession when a station is offered in the tender for the first time – if the station owner wins the tender then he pays the state 30% of the price he offered or the difference between his bid and the next-lowest bid, whichever is the smaller amount. If the station owner loses the tender he will receive its value based on the price in the winning bid. As noted below, a similar mechanism exists in Belgium – but without the concession component, and a list of the sites of all the companies and dates on which they will be tendered is also published. In Belgium, BOT (Build, Operate, Transfer) tenders are customary for the construction of motorway gas stations, and there is legislation to regulate disclosure of full and fair information prior to entering into contracts. In addition, the three countries are subject to the 1999 European Regulation of Vertical Restraints, which limits the term of exclusive contracts (such as with suppliers and agents) to a maximum of five years unless the supplier is the owner or leases the site. C. Gas station licensing and operations in the fuel sales segment: Delek Benelux is required to comply with a range of municipal, regional and national regulations in each country in which it operates, including periodic testing of soil quality, licensing of station buildings and directives relating to fire extinguishing. Detailed directives also apply to the construction and operation of motorway gas stations. D. Environmental protection requirements: See section 1.9.24. E. Licensing for operating convenience stores: Convenience stores are subject to various federal and state regulations governing health and sanitation, safety, fire, and planning and construction. F. Fuel taxation: Tax rates on fuel sales in the Netherlands and Belgium are currently among the highest in Europe. Tax rates in Luxembourg are lower than in neighboring countries. G. Labor laws: Delek Benelux and its subsidiaries are subject to legislation regarding wage protection, overtime and work conditions. In addition, labor laws in the Benelux countries restrict layoffs, and require various actions to be taken for premature termination of employment (such as applying for prior approval from a government agency, or a relatively long notice period prior to actual termination of employment). It is noted that trade unions in the Benelux countries are relatively powerful, and have the right to obtain information on significant issues, to be consulted on various processes (such as the sale of an operation, or liens) and are even able to prevent certain Delek Benelux initiatives by turning to the courts. Labor relations at Delek Benelux are proper. H. Price control: In the Netherlands, there are no regulations prescribing maximum prices for fuel. In Belgium, a law prescribes maximum prices and there is a price control arrangement based on this law, between the Belgian Ministry of Economics and the country's fuel association. The Ministry sets maximum fuel prices. In Luxembourg, there is a mechanism for setting maximum prices similar to the Belgian mechanism, although it is based on other laws. Furthermore, the Benelux countries have limitations on price fixing between fuel companies, by virtue of antitrust laws.

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1.9.26 Material engagements Delek Benelux considers the franchise agreement with Texaco and the fuel supply agreement with Nerefco to be material engagements. For details, see sections 1.9.17, and 1.9.19, respectively. For details of the agreement to acquire the marketing activity in France, see section 1.9.29. 1.9.27 Legal proceedings Delek Benelux is in an arbitration proceeding with Chevron in connection with Delek Benelux’s claim against Chevron regarding its liability for erroneous historical reporting (to the authorities) about income from convenience stores at fuel stations along motorways in Belgium and the consequences of this report on representations given as part of the acquisition of the fuel operation from Chevron. 1.9.28 Strategy and objectives Delek Benelux reviews its goals and strategies from time to time and revises them according to developments in the fuel market, the competition and macroeconomic effects. Delek Benelux operations in the coming years are expected to focus on the following activities: A. Expansion of retail operations in filling compounds, inter alia, by opening additional convenience stores and car wash facilities. B. Review of possibility of converting CORO and RORO stations to COCO stations. C. Conversion of CORO stations to CORO Plus stations. D. Increased efforts to market fuel products, increase brand awareness and increase convenience store sales. E. Cost-cutting at non-profitable sites, through optimization of product purchasing, efficient inventory management, and more. F. Renovation and rebranding of convenience stores to GO - The Fresh Way, including addition of new products (with a focus on fresh products), smart product arrangement and efficient inventory management to reduce costs. G. Optimization of gas station deployment, including acquisition of attractively-located new sites. Investment in Delek Benelux IT systems, including ERP and CRM systems, the ENVOY store management system to improve the company's pricing management system. H. Achievement of operational excellence by computerizing processes and administration. Development of the fuel card sales system for the SME sector. Search for additional RORO retailers and focus on retention of existing markets. I. Implementation of additional investments to achieve operational improvements and cut costs, inter alia by sourcing the maintenance and electronic invoice management systems. J. As described in section 1.9.27, the acquisition of shares in BP France is likely to have a significant effect on Delek Benelux’s strategy. Belgium and Luxembourg are neighbors of France and this will certainly lead to cross-border opportunities, both in terms of cross-border sales (fuel cards) and the opportunity to activate two segments of operation. 1.9.29 Development in the coming year On February 4, 2010 Delek Europe submitted a binding offer to BP France SA (“BP”) for the acquisition of its retail fuels and convenience business in France, including 416 BP petrol stations, convenience stores throughout the country and its holdings in 3 terminals (the “Marketing Activity”). The offer includes the grant of a license for the exclusive use of the BP brand in its French gasoline station network. In consideration of the acquisition of the Marketing Activity, Delek Europe has offered to pay EUR 180 million, subject to working capital and other adjustments at completion. Following submission of the offer, Delek Europe paid a deposit of EUR 10 million in return for exclusivity from BP to negotiate completion of the transaction for the acquisition of the Marketing Activity .The offer is valid until October 15, 2010. For further details of the transaction’s conditions precedent and the Marketing Activity, see Immediate Report dated February 4, 201 (ref. no. 2010-01-374796) which is attached herewith by way of reference.

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1.9.30 Risk factors Delek Benelux estimates the following to be the major risk factors associated with its operations in the Benelux countries: A. Competition: The fuel market in the Benelux countries includes several large competitors which are constantly striving to increase their market share. Competition is manifested in the acquisition of gas stations, sales promotion, price reduction, and more. Increased competition, including the entry of hypermarkets, may affect segment margins and the business results of Delek Benelux. Furthermore, existing and future regulatory restrictions aimed at limiting the power of major market players and increasing market competitiveness could affect the ability of Delek Benelux to expand its operations or might restrict it in contracting with other parties. B. Exposure to fluctuations in global fuel prices: The price paid by Delek Benelux for the fuel products it purchases is derived from the global fuel market price, and therefore it is exposed to changes in fuel prices in these markets. The factors influencing fuel prices include changes in the state of the global and local economy, the level of demand for fuel products in and outside Benelux countries, the geopolitical situation in general and in the oil producing regions in particular (USA, the Middle East, former Soviet Union countries, West Africa and South America), the production level of crude oil and petroleum distillates around the world, development and marketing of fuel substitutes, disruptions in supply lines, and local factors including market and weather conditions. The rise in fuel prices around the world causes a rise in prices of products sold by Delek Benelux which can lead to a decrease in demand for these products, while impairing its profits on every product sold. At the same time, since fuel prices are expressed in US dollars, and despite Delek Benelux’s strategy of hedging its open foreign currency position, the exchange rate between the euro and the US dollar is also likely to affect Delek Benelux’s purchase prices. C. Environmental protection requirements: Although the statutory provisions for environmental protection in the Benelux countries are relatively stringent, future regulations and orders due to increasing awareness of the dangers associated with uncontrolled operations by fuel companies in general, and by Delek Benelux in particular, could increase the monetary expenditure of Delek Benelux. In addition, failure to comply with the regulations could lead to sanctions, expose Delek Benelux to lawsuits and impair the results of operations. The current situation is that environmental regulations are quite stable. D. Credit limits and financing needs: Delek Benelux operates under a financing and current credit agreement. On December 31, 2009, Delek Benelux had loans and letters of credit as noted in section 1.9.22. These liabilities are liable to increase Delek Benelux's vulnerability to negative economic changes, compel it to allocate a substantial part of its cash flows for debt repayment, limit its ability to plan, make changes and react quickly to changes in its operations, and curtail its ability to borrow additional funds. As long as the economic crisis continues, and even worsens, Delek Benelux's ability to obtain financing on favorable terms could be affected, and therefore also its ability to finance or expand its ongoing activities. E. Alternative energy sources: Transition to the use of alternative energy sources, such as natural gas and electric-powered engines could have an adverse effect on the volume of fuel sold by Delek Benelux or, alternatively, might require it to adapt gas stations to new customer requirements which would involve significant investment. F. Biofuels: A government push to increase the use of biofuels will lead to additional investments to allow for the blending and distribution of these products. G. Food regulation: Food products sold in convenience stores and in the GO - The Fresh Way convenience stores are subject to various regulatory requirements. Failure to comply with these requirements and incurring the resultant damages, or more stringent regulatory requirements could affect the business results of Delek Benelux. H. Fuel taxation: An increase in the current fuel tax rates in the Benelux countries could affect fuel consumption in these countries and might also have an adverse effect on the business of Delek Benelux. I. Economic slow-down in the local market: (Benelux countries) – A continuation and even acceleration of the global economic crisis could lead to a continuing decline in fuel consumption and retail products purchased at Delek Benelux's compounds, and could affect the business results of Delek Benelux.

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J. Regulatory involvement: Delek Benelux is subject to a range of regulatory provisions on matters such as gas station licensing, labor laws, environmental protection, price control and restrictive trade practices. Violation of regulatory requirements, or more stringent regulatory requirements applicable to Delek Benelux could lead to increased expenditure, prohibit the expansion of operations or affect existing operations, and might have an adverse effect on the business of Delek Benelux. K. Discontinuing operation of gas stations with relatively extensive operations: Operating volumes vary from station to station, so that that some gas stations account for larger operating volumes than others. Discontinuing or reducing operations in COCO gas stations with relatively larger operating volumes, such as the Capellen station in Luxembourg, for any reason, would have an adverse affect on the operations of Delek Benelux. L. Franchises used by Delek Benelux in its operations: Delek Benelux uses a Texaco franchise for fuel and store branding. Discontinuing the use of these franchises for any reason could affect the business results of Delek Benelux. M. Delek Europe has submitted a binding offer for the acquisition of a material fuel marketing activity in France. Failure by Delek Europe to complete this transaction could cause it to lose the EUR 10 million deposit it paid for exclusivity and fail to realize a business opportunity. Completion of the transaction involves risks such as integration of the activity into its existing operation, unforeseen business expenses generated by the activity, the need to obtain financing and an increase in Delek Europe’s debt, subordination to additional regulation, etc. Below is a summary of the risk factors by type (macro risks, industry-wide risks and risks specific to Delek Benelux), rated according to the estimates of the Delek Benelux management of the effect on Delek Benelux's business: major, medium or minor effect.

Degree of risk factor effect on Delek Benelux's business Minor effect Moderate effect Major effect Macro risks 1. Economic slowdown in the local market Industry-wide risks 2. Environmental 5. Competition 8. Exposure to protection 6. Fuel taxation fluctuations in fuel 3. Alternative energy 7. Regulatory prices and to sources involvement dollar/euro exchange 4. Food sector rate regulations Company-specific 9. Credit limits 10. Discontinued risks for Delek operations in gas Benelux stations with relatively extensive operations 11. Franchises used by Delek Benelux for its operations

The effect of these risk factors on Delek Benelux's businesses is based exclusively on estimates, and the actual effect might differ.

1.10 The Automotive Segment

The Group’s automotive segment is based on the activities of Delek Automotive Systems Ltd. and its subsidiaries and other corporations (Delek Automotive Systems Ltd., the subsidiaries and its corporations are referred to collectively as “Delek Automotive”). Delek Automotive has been operating in Israel since 1994 as importer, distributor and seller of Mazda vehicles and vehicle parts. In 1999, the company started to import, distribute and sell Ford vehicles and vehicle parts in Israel. Delek Automotive also operates a service center (main garage) where it provides maintenance and repair services to its customers and provides support and guidance for Mazda and Ford dealerships and service centers (authorized garages) around the country (for details, see sections 1.10.2A and 1.10.2B). Delek Automotive also has a concession to market, distribute and sell Lincoln vehicles and vehicle parts in Israel. At the date of this report, Delek Automotive does not sell Lincoln vehicles and vehicle parts.

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Delek Automotive is a public company and its securities are traded on the Tel-Aviv Stock Exchange Ltd. (“TASE”). The following chart describes the structure of the main holdings of Delek Automotive:

Details of investments in Delek Automotive's capital in the two years prior to the reporting date:

Capital % of issued investments Date Type of transaction capital (NIS thousands) Q2 2008 Exercise of option warrants into 0.23% 4,540 shares Q3 2008 Exercise of option warrants into 0.04% 789 shares Q3 2009 Exercise of option warrants into 0.15% 2,283 shares Q1 2010 Exercise of option warrants into 0.11% 1,342 shares

To the best of the Company's knowledge, in the past two years no material transactions in the shares of Delek Automotive have been made by interested parties in Delek Automotive outside the stock exchange, except for those listed below: Date Interested party Transaction % of issued Consideration type capital (in NIS thousands) June 29, 2008 Delek Investments and Sale 1% 50,220 Properties Ltd. October 6, 2008 Gil Agmon, CEO of Delek Purchase 0.73% 21,015 Automotive February 5, 2009 Delek Investments and Purchase 0.63% 13,299 Properties Ltd. February 12, 2009 Delek Investments and Purchase 0.14% 2,885 Properties Ltd.

1.10.1 General information about the segment A. Structure of segment of operation and changes therein The Israeli automotive market differs from most other automotive markets in the world due to its geographical isolation and high import taxes on vehicles. The motorization level in Israel is low compared to western countries, due to a relatively low standard of living, relatively high prices due to high import taxes, poor road infrastructure and high population density. The automotive market is comprised of a relatively high number of vehicle importers (compared to other sectors in the economy) that import vehicles manufactured in different parts of the world. Most importers import only two or three brands.

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The development of the automotive market in Israel is characterized by volatility stemming, inter alia, from changes in the macroeconomic environment. Among the characteristics and trends affecting the operations of Delek Automotive and its competitors are these: (a) dependence on suppliers: the business success of the vehicle importers depends on the financial and business positioning of the manufacturers and on new product strategies, global brand management, model and pricing policy and marketing support; (b) changes in consumer preference: consumers' preferences for certain models are based on technological advantages, price and marketability in the secondary market; (c) taxes: in Israel, purchase taxes and import duties on private cars – among the highest in the world – can amount to almost 100% of the price of the vehicle. The taxes affect the purchasing power of private consumers and therefore could affect Delek Automotive sales. For a description of the purchase tax reforms applying to all private vehicles, see section 1.10.14A; (d) fuel prices: these prices can affect consumer preferences, resulting in a long-term impact on the type of vehicles sold, based on fuel type (diesel, natural gas or gasoline). B. Legal, regulatory, standardization and special constraints in the segment The vehicle market is influenced by legislative and regulatory requirements, which are a significant factor that could affect the supply of and demand for vehicles in Israel. 1. In 1999, the government introduced a reform in the Israeli automotive market. The Ministries of Finance and Transportation set up a committee to remove barriers and eliminate centralization in the automotive market and to open it up to competition. The committee recommended a series of steps which were adopted by legislation. The main reform was the elimination of the legal requirement for importer exclusivity. An additional report on the subject was issued in December 2003, recommending that direct contact between manufacturer and dealer no longer be required, allowing the importer to deal with authorized dealers of the brand provided there was a mechanism to ensure appropriate technical standards, the technical suitability of the vehicle to Israel, warranty requirements, the availability of vehicle parts and support services, and the authorized dealer’s financial ability as described in the committee’s report (“Parallel Import”). On February 15, 2010, the Knesset Economy Committee approved an amendment to the Control of Commodities and Services Order (Import of Vehicles and Provision of Vehicle Services) which was designed to remove the principal barriers to the parallel import of vehicles. The amendment to the Order stipulates that a vehicle importer may be anyone who has an agreement with the manufacturer of an imported vehicle (“Direct Importer”) or with an authorized agent of the manufacturer of an imported M1 type vehicle (passenger vehicle whose total permitted weight does not exceed 3,500 kg) of the same model and the same standardization as that of the vehicles imported by the Direct Importer (“Parallel Importer”). An authorized agent is defined in the Order as a person who has a valid written agreement with the manufacturer of imported vehicles for at least two years from the date of submission of the application for an import license, which states that he is authorized to sell said vehicles in one of the EU countries or in the USA. This is subject to the fulfillment of two conditions: that he marketed new vehicles of said manufacturer in accordance with an agreement which was valid in the three years preceding the application for an import license, and that in the year preceding the year of application for an import license he sold more than 2,000 new vehicles. The definition of a vehicle manufacturer has been expanded to include a person to whom a vehicle manufacturer has given written authorization to act on its behalf and sell its imported vehicles in Israel for at least three years, subject to the standardization documents being issued in his name. The amendment lays down threshold requirements for a vehicle importer applying for an import license which include, inter alia, presentation of an undertaking to provide vehicle maintenance services by means of one central garage located in one of the cities Tel Aviv, Jerusalem, Haifa or Beersheba with a waiver of the requirement for four service garages (one service garage in each of the above cities), presentation of a bank guarantee whose amount will be determined in accordance with the type of vehicle imported (with no connection to the ownership of the central garage as was determined in the previous version of the amendment) and minimum equity capital of NIS 10 million. The Order stipulates that a Parallel Importer will not import more than three models, subject to the authority’s ability to change the number of vehicles in compliance with the terms of the Order. The amendment imposes obligations on an importer in order to ensure his stability and ability to provide after-sale vehicle warranty and maintenance services. A violation of these obligations will lead to the forfeit of the guarantee deposited by the importer to ensure his compliance with the provisions of the Order and suspension

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of his import licenses. The Ministry of Transport believes that Parallel Import will bring about reductions in vehicle prices and increased demand for new vehicles which will reduce the average vehicle age. Delek Automotive estimates that Parallel Import is not economically feasible under current market conditions, with the exception of luxury and niche cars. Since most of the vehicles imported by Delek Automotive do not fall into these categories, Delek Automotive does not expect Parallel Import to have a substantial impact on its operations. The estimate of Delek Automotive’s management regarding the effect of Parallel Import on its operations is forward-looking information as defined in the Securities Law, 5728 – 1968, and it is based, inter alia, on the fact that consumer prices of vehicles in Israel which are not luxury or niche cars, less taxes, are among the lowest in the world. This is an estimate which might not be realized, inter alia, because of changes in vehicle import tax rates and regulatory changes regarding Parallel Import. In addition, an order pursuant to Section 50B of the Restrictive Trade Practices Law, 5748- 1988, which came into force on April 24, 2003, prohibits car importers from entering into restrictive arrangements, with the aim of opening the vehicle parts market to competition. 2. Vehicles sold in Israel are divided into licensing groups based on their price as determined by the tax authority at the beginning of every calendar year. An annual licensing fee is paid on the basis of these licensing groups which until January 1, 2010 were also used to determine the use value of a vehicle purchased until this date. This meant that a change in the price group affected prices of new vehicles because of the desire of vehicle importers to belong to a particular price group. In light of the change in the method of calculating the use value of a company car from the price group method to the linear method (whereby the use value will be a rate determined by the price of the vehicle to the consumer), as of January 1, 2010, a change in the price group no longer affects prices of new vehicles. On December 31, 2007, the Finance Committee approved a 2.5% update to the price groups of all vehicle groups relative to the group update in December 2006. As a result, most vehicle importers adjusted vehicle prices downwards in January 2007 and January 2008. Although in the last quarter of 2008 the Ministry of Finance had announced its intention to revise vehicle price groups downwards, in December 2008 it was decided that there would be no change to the price groups as there had been in previous years, and so in January 2009 vehicle prices remained the same. Furthermore, many importers, including Delek Automotive, even raised the prices of some of their imported vehicles following the directive permitting importers to link vehicle prices to changes in exchange rates compared with the exchange rate prevailing when the price groups were set, without there being any change in the classification in the relevant price groups. 3. In January 2007, the Ministry of Finance announced a plan to gradually increase the value of the use of company vehicles over a number of years. On November 27, 2007, the Knesset Finance Committee approved this plan and on December 31, 2007 the Income Tax (Value of Use of a Vehicle) (Amendment) Regulations, 5767-2007 came into force. Under these regulations, the use value of a company car would be increased gradually over four years, from January 1, 2008 to January 1, 2011. Along with the approval of these regulations, the tax rates for middle level income earners would be reduced, with the aim of partially offsetting the additional tax paid by the users of company cars. Delek Automotive believes that these regulations could have a long-term impact on the distribution of vehicle sales in Israel, and on the distribution of Delek Automotive sales between institutional customers (including leasing companies) and private customers. At the date of this report, the change has not affected sales in the automotive sector.. 4. In 2005, a further reform was introduced in the vehicle market in Israel, relating to changes in the purchase tax on vehicles. As part of these reforms, gradual (multi-annual) tax reductions were applied to private and commercial vehicles so that the purchase tax on commercial vehicles would equal that on private vehicles. At the same time the tax incentives on safety accessories (ABS and two airbags) were reduced to the point where they were cancelled on January 1, 2008 which offset the impact of the reduction in the above-mentioned purchase tax rate. Tax incentives are also granted to encourage the installation of safety accessories in addition to those already existing.

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5. In June 2009 the Minister of Finance and Minister of the Environment announced a green taxation government policy which determined, inter alia, the following1: (1) As of August 1, 2009 there would be a “green index” which would grade vehicles in accordance with their pollution level which is set by weighting the public costs of pollutant emissions and setting a purchase tax based on this grade. It determined that instead of a vehicle purchase tax of 72% - 75% (private or commercial, respectively), purchase tax would be applied at the rate of 92% with a tax reduction which would take the form of a shekel incentive whose amount would derive from the vehicle’s pollution level. The combination of a higher tax rate and shekel incentive would not necessarily lead to an increase in the effective tax and in some cases it would even reduce the tax burden. It also determined a reduced purchase tax rate of 30% for hybrid vehicles and 10% for zero-pollution vehicles (such as electric vehicles) for a number of years, subject to the pollution levels of these vehicles. The pollution grade would be stamped in vehicle licenses. A file containing car models with emissions data would be published on the Ministry of Transport website and vehicle importers would have to state the pollution data and fuel consumption on each new vehicle offered for sale. Failure to present the pollution data in accordance with the requirements of the Ministry of Transport would lead to classification of the vehicle in the highest pollution grade, in other words, such a vehicle would not attract tax incentives based on the pollution grade. The purchase tax calculation rules would also apply to the importation of used vehicles. (2) As of January 2010 the method for calculating the use value of a company car would change from the price group method to the linear method whereby the use value would be a fixed rate of the consumer price. This method would be applied only to new vehicles registered after January 1, 2010, while the price group method would continue to be applied to existing vehicles and those registered up to January 1, 2010. On November 25, 2009 the Knesset Finance Committee approved the green taxation reform which includes the above-mentioned changes in purchase tax and use values subject to the following: (1) the basic rate of purchase tax would be reduced from 90% to 83% against cancellation of the tax incentive granted to vehicles equipped with an electronic stability control mechanism. (2) The monthly usage rates for 2010 are 2.04% for vehicles priced up to NIS 130,000 and 2.48% for vehicles priced over NIS 130,000. The use value in 2011 will be 2.5% of the vehicle price but if there are material changes in vehicle prices in the coming year (either increases or reductions), there could be changes in the use value rate. In any event the value will not rise above 2.6% and will not fall below 2.43%. Moreover, as of the 2010 tax year there will be a reduction of NIS 520 per month in the use value of hybrid vehicles irrespective of their purchase date. Delek Automotive believes that changes in recording income for the use of such vehicles could have a long-term effect on the ratio between sales to institutional customers (leasing and rental companies) and private customers, as well as on all vehicle sales in Israel. In addition, Delek Automotive estimates that the effect of this reform on its market segments is not significant. This estimate is forward-looking information based on past experience where its sales were not affected after the above-mentioned reductions of the past two years. This forward-looking information might not be realized because this estimate is not certain and it could change, inter alia, because of the economic slowdown in the economy, and changes in import currency rates could affect the purchasing power of new vehicles [sic]. 6. .For further details of legal restrictions and arrangements applicable to the importation of vehicles and spare parts, see section 1.10.15. 7. Standardization A) Each year, the Standards Department of the Ministry of Transport’s Motor Vehicle Division redefines the mandatory requirements for various car types for the next model year, citing the amendments to European standards and the specific demands for Israel. Mandatory requirements in Israel are based on EEC directives and US federal standards. The standards focus on air pollution and passenger and pedestrian safety. Vehicles that are not in compliance with these standards are not permitted to be imported into Israel. In 2004, the Standards Department directed that commencing January 1, 2006, importers of vehicles weighing up to 3.5 tons are required to comply with the Euro 4 standards for air pollution. Accordingly, vehicles imported by Delek Automotive comply with this standard. As stated in section 1.10.1

1 All this information is taken from the Ministry of Finance website: http://www.mof.gov.il/TaxesPage/Pages/Ecotax.aspx

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B.5, on August 1, 2009 the purchase tax reform pertaining to vehicle pollution levels took effect. B) According to the Transportation Regulations, 5721-1961, registration or licensing of a vehicle is subject to Licensing Division examination and approval of the vehicle prototype and certification from an approved laboratory, or any other certificate as required, certifying that the vehicle is the same as the prototype or model. C) Article 282 of the Transportation Regulations, 5731-1961 regulates the conditions for vehicle registration. One of these conditions is registration of the manufacture year in the vehicle license by the vehicle identification number (VIN) method. According to this method, which is used in Israel, the model year is marked by the tenth digit in the car’s serial number stamped on the chassis. Transportation (Amendment No. 3) Regulations, 5768-2007 cancels the duty to register the manufacture year (model year) for new cars. Starting April 1, 2008, registration is only required for the date they take to the road. It was also determined that a vehicle must be registered within 12 months of its model date, with the exception of special cases defined in the regulations. The purpose of this cancellation was to advance Parallel Import. The regulations came into force on January 1, 2008. 8. For further details of the legal restrictions and arrangements applicable to the importation of vehicles and spare parts, see section 1.10.15. C. Changes in the volume of segment operation and its profitability In recent years, market conditions have improved for Israeli consumers due to favorable currency exchange rates and tax reductions. Continuing the growth trend in vehicle deliveries in 2005-2007, vehicle deliveries in 2008 increased by 1.3% to 198,467, compared with 195,686 deliveries in 2007.1 In the first three quarters of 2008 there was significant growth in vehicle deliveries compared with the corresponding period in 2007. This growth was halted by a sharp drop in vehicle deliveries in the fourth quarter of 20082 compared with the previous quarters, which offset the growth in the first three quarters of 20081. This decline also continued in the first half of 2009 but was halted in the second half of the year. The result was that vehicle sales in 2009 totaled 176,387 which constitutes a decline of 11% in total deliveries compared with 2008. The changes in the volume of activity in the automotive market were due to the increase in sales to institutions. These customers do not always service their vehicles at an authorized garage chain and some use non-original vehicle parts. Nevertheless, Delek has agreements for maintenance and supply of vehicle parts with a number of large organizations, such as leasing companies and the Ministry of Defense. Delek Automotive estimates that changes in the operational leasing sector, should they take place, will not have a material effect on its sales of vehicle parts. D. Critical success factors in the segment and changes therein In the opinion of Delek Automotive, several significant factors contribute to the success of importers of vehicles and vehicle parts in Israel: (a) new models and their branding among consumers; (b) high marketing ability of the importer; (c) the reputation and service level of the importer, vehicle parts supplier and garage; (d) good relations with the manufacturer; (e) commercial relations with leasing and rental companies; (e) the trading conditions in which Delek Automotive operates, and specifically, the currency exchange rates applying to imports and the exchange rates of the currencies used by competitors; (f) the resale value of vehicles in the used car market; (g) the prices of vehicle parts, since parts are available from a large number of suppliers; (h) the availability of vehicle parts. E. Principal entry barriers to the segment In the opinion of Delek Automotive, the entry barriers to the vehicle import segment in Israel are relatively high, for the following reasons: (a) the strong ties between the importer and the

1 This information is to the best of Delek Automotive's knowledge and is quoted from Vehicle Importers Association reports dated January 2009. 2 This decline in vehicle deliveries in the fourth quarter stems from the expectation of a reduction in vehicle prices resulting from the Ministry of Finance’s publication of its intention to revise the price groups downwards, as well as from the global economic crisis, which has also affected the Israeli market

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manufacturer; (b) the essential financial strength of the car importer; (c) the great importance of the level of service provided by the importer and its past experience with customers. However, in the opinion of Delek Automotive, there are no entry barriers to the vehicle parts import market. Among the reasons for this are that trading in vehicle parts requires a license from the Ministry of Transport and obtaining such a license does not involve a large investment of resources and effort. F. Competitive environment and changes therein For details, see section 1.10.6. 1.10.2 Products and services A. Mazda and Ford vehicles Delek Automotive imports, distributes and sells a range of Mazda and Ford private and commercial vehicles under concessions from the manufacturers. For a description of the concession agreements, see sections 1.10.16A and 1.10.16B. From the start of operations through December 31, 2009, Delek Automotive has delivered 451,300 vehicles to Israeli customers, of which 341,200 were Mazda models and 110,100 were Ford models. The following tables illustrate the breakdown of vehicle deliveries by Delek Automotive in units for 2009 and 2008, by quarter and by manufacturer: 2009 Manufacturer Q1 Q2 Q3 Q4 Total Mazda 6,169 6,462 9,278 9,776 31,685 Ford 3,325 2,024 4,203 2,937 12,489 Total 9,494 8,486 13,481 12,713 44,174

2008 Manufacturer Q1 Q2 Q3 Q4 Total Mazda 11,108 9,262 8,548 2,619 31,537 Ford 3,335 2,945 3,686 1,668 11,634 Total 14,443 12,207 12,234 4,287 43,171

Delek Automotive imports, markets and distributes vehicles for different market segments: family sedans (Mazda 3 and Ford Focus), executive cars (Mazda 6 and Ford Mondeo), 4x4s (Ford Explorer and Ford Edge), transport vehicles (Ford Transit and Ford Econoline), minivans (Mazda 5, Ford S-MAX and Ford Galaxy), commercial vehicles (Mazda BT-50, Ford F-350 and Ford Connect) and mini cars (Mazda 2 and Ford Fiesta). The market share of Delek Automotive in 2009 and 2008 was 25% and 22% of all vehicle deliveries in Israel1. The new Mazda 3 was successfully launched in July 2009 after sales of its predecessor had had reached 100,000 units. In addition, Delek Automotive has a concession for the marketing, distribution and sale in Israel of Lincoln vehicles and vehicle parts. At the date of this report, Delek Automotive does not sell Lincoln vehicles and parts. B. Importation of vehicle parts and provision of garage services Delek Automotive markets and distributes all types of vehicle parts and accessories for the vehicles it imports. In addition, Delek Automotive provides maintenance and repair services for its customers, and support and training for agents and service centers (authorized garages) for Mazda and Ford vehicles at its central service center (the central garage), which has recently relocated to its new logistics center in Nir Zvi (see section 1.10.7). The price and the method of providing services at the central garage and the authorized garages are based on “manufacturer hour”

1 Based on reports published from time to time by the Automobile Importers Association.

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(the price for an hour’s work required to carry out any job as defined by the manufacturer). The authorized garages comply with standards defined by Delek Automotive and set out in their agreements. The authorized garages are supervised by regional service inspectors, who visit the garages weekly, inspect compliance with the standards and solve problems. 1.10.3 Revenue and product segmentation A. The following table shows data for Delek Automotive revenues from products and services in 2009 and 2009 (in NIS millions), as a percentage of the Group’s net revenue and as a percentage of the automotive segment's revenue: 2009 2008 % of % of % of Group segment % of Group segment NIS millions revenue revenue NIS millions revenue revenue Import and sale of 4,360 10.04% 91.93% 4,390 9.49% 92.03% vehicles Sale of parts and 383 0.88% 8.07% 380 0.82% 7.97% garage services Total 4,743 10.92% 100% 4,770 10.31% 100%

B. Below is data for Delek Automotive gross earnings from products and services in 2009 and 2008 (in NIS millions), as a percentage of the Group’s profit and as a percentage of automotive segment profit: 2009 2008 % of % of % of Group segment % of Group segment NIS millions profit profit NIS millions profit profit Import and sale of 379 5.90% 72.20% 799 14.30% 85.18% vehicles Sale of parts and 146 2.28% 27.80% 139 2.50% 14.20% garage services Total 525 8.18% 100% 938 16.8% 100%

C. The rate of gross profit out of revenues in the segment in 2009 and 2008 is 11.1% and 19.66%, respectively. 1.10.4 Customers A. There are two main categories of Delek Automotive customers: private and institutional. Institutional customers include car leasing and rental companies and the government vehicle administration. Below is the breakdown of sales to private and institutional customers for 2009 and 2008: 2009 2008 Private customers 36% 42% Institutional customers 64% 58%

This breakdown of sales does not stem from Delek Automotive's policy but from the structure of the vehicle market in recent years. In view of the large numbers of vehicles purchased by institutional customers, these customers are granted bulk discounts and preferential credit terms. Because of the difficulty in obtaining bank credit due to the global slowdown which has affected the Israeli market, there has been a material change recently in the credit terms offered by Delek Automotive to its institutional customers. For some of them, the change has taken the form of a significant extension in the credit period compared with the norm until now (eighteen months up to less than three years), and interest has been charged to these customers on the balance of the credit against a first lien on the customers’ rights in the vehicles sold and in some cases on their rights to receive funds for leasing those vehicles. (See also sections 1.10.11D and 1.10.20F).

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B. Delek Automotive customers who purchase vehicle parts and maintenance services are mainly customers of the central garage, authorized garages, distributors, private customers and insurance companies that provide services for their customers in the context of insurance, and institutional customers. 1.10.5 Marketing and distribution A. Delek Automotive markets and distributes the cars it imports through eight showrooms owned by Delek Automotive and through eight showrooms owned by independent dealers. Most Delek Automotive sales are completed at its showrooms. Delek Automotive also sells directly by approaching institutional customers. B. Delek Automotive's showrooms are located around the country. They are rented from third parties, with the exception of the Mazda showroom in Tel-Aviv, which Delek Automotive owns, and the Ford showroom in Tel Aviv, which is leased from Delek Investments. At the reporting date, Delek Automotive, together with an investee of its controlling shareholder, is erecting an income-generating property in Tel Aviv called Mazda-Ford House. It will contain a showroom and will be leased to Delek Automotive for its operations. For details, see section 1.10.7C. C. Delek Automotive has agreements with six independent dealers that maintain and operate showrooms in major cities for displaying the cars it imports. The agreement with the dealers is not exclusive, and Delek Automotive can contract with other dealers on the same or better terms. However, there are specific areas in which Delek Automotive agrees there will be no more than one dealer (although Delek Automotive itself may operate in any area). The agreements with the dealers are for one-year periods from the date of signature and are renewed automatically for one year unless one of the parties gives three months' written notice of termination. Delek Automotive sets the commissions paid to dealers, and the payments are made only after it receives full payment for the sale of the vehicle. D. Most Mazda and Ford vehicle parts are marketed by the company’s central logistics center in Nir Zvi and sold to 53 national authorized garages (service centers) servicing Mazda and Ford vehicles (“Authorized Garages”). Delek Automotive also sells parts through dealers and distributors of vehicle parts in Israel. In recent years Delek Automotive has been upgrading the Authorized Garages.. This process comprised an improvement to the front areas of the service centers in Israel as well as the introduction of uniform standards, so that the Authorized Garages now comply with the highest international standards. Under agreements between Delek Automotive and the Authorized Garages, the Authorized Garages are required to operate, maintain and manage their garages at their expense according to Delek Automotive regulations and according to the law. The Authorized Garage owner is also required to use only parts and accessories that comply with the quality standards of the automobile manufacturer. Delek Automotive is authorized to instruct the Authorized Garages to use specific parts, as stipulated in the agreement. The Authorized Garage owner is required to purchase and maintain stocks of vehicle parts that comply with quality standards and which satisfy the level of service required for Delek Automotive customers, as defined by Delek Automotive from time to time. The Authorized Garage owner undertakes to repair, without charging the customer for work and/or parts, any vehicle covered by a Delek Automotive manufacturer's warranty and/or service agreement, provided the repair is included in the warranty and/or service agreement and Delek Automotive approves the repair in advance. Delek Automotive will pay the Authorized Garage owner for services rendered under the warranty or service contract, in an amount that includes the price for parts less a discount decided upon from time to time by Delek Automotive, plus labor costs as determined in the agreement. The agreements are valid for one year, and are renewed automatically for one- year periods. Each party may terminate the agreement by giving three month's written notice. E. Delek Automotive markets its products through advertisements in the media, at the discretion of its management and in compliance with the manufacturer's standard rules. 1.10.6 Competition The Israeli automotive market is oligopolistic and includes a number of importers representing various manufacturers. The competition in the vehicle market is between the various importers and, while reflected in the large number of car models imported from different parts of the world (Europe, USA and the Far East), is not reflected in the representation of a particular manufacturer by more than one importer. The competition is based mainly on brand, model, price, payment terms, service quality and the car’s resale value in the used car market. External influences on the Israeli market include competition in the global automobile market, car manufacturers, exchange rates of the currencies in which the cars are purchased. Internal influences include the activities of

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the other importers in the Israeli market. To the best of Delek Automotive’s knowledge,1 its main competitors are Union Motors (Toyota importers), Colmobil-Kolmotor (Mercedes, Hyundai and Mitsubishi importers), Japanauto (Subaru importers), David Lubinski (Peugeot and Citroen importers), Moshe Carasso & Sons (Nissan and Renault importers), Champion Motors (VW, Audi and Seat importers) and UMI (General Motors – Opel, Saab and Isuzu importers). In 2009, Delek’s market share was 25% of the total automotive market and 28% of private sales (compared with 22% and 25% respectively in 2008).. There is intense competition in the vehicle parts and garage service markets. The competition to sell parts takes place against the backdrop of original parts imported by Parallel Import, generic parts,. counterfeit parts, parts from used cars, reconditioned parts and stolen parts are also available. Authorized and unauthorized garages compete for service. Delek Automotive cannot estimate its market share in the service and vehicle parts market, since there are no official data in this field, due to the numerous service providers, distributors, and small- and medium-size dealers. 1.10.7 Property, plant and equipment, and facilities Below is a summary of the main real estate and other material property, plant and equipment of Delek Automotive: A. The Mazda showroom in Tel Aviv is owned by Delek Automotive and the Ford showroom in Tel Aviv is leased from Delek Investments. B. Delek Automotive has a new logistics center near Moshav Nir Zvi. The center includes storage areas and offices with a total built up area of 85,000 sq.m. (“the Logistics Center”). The Logistics Center covers an area of 64,300 sq.m., for which Delek Automotive has leasing rights through 2045 (with an option for a 49-year extension). The designation of this land according to the plan applicable to it is a tubes and accessories factory – an industrial and storage area for a factory. The Logistics Center, which was completed in 2004, is one of the most advanced of its kind and it was built with an eye on the future of Israel's car market. At the date of this report, activities in this area include vehicle storage, preparation and delivery of vehicles to customers, and marketing and sales of vehicle parts. Delek Automotive's management and service staff are also located in this center. The Logistics Center currently has capacity for storing about 2,500 vehicles, and will have a future capacity for another 1,000 vehicles. At the date of the report, Delek Automotive uses 100% of its maximum storage space. Delek Automotive does not expect to make another such significant investment in it. Between 2002 and 2006, the Logistics Center was granted building permits, the last of which was granted on January 10, 2006 for the entire Logistics Center real estate for changes in the buildings in the compound, as well as for the construction of an additional building which includes the central garage. This building permit is subject to the terms stated in it, some of which are being addressed by Delek Automotive. At the date of this report, not all the buildings in the Logistics Center have received a Form 4. For details of legal proceedings pertaining to construction at the Logistics Center, see sections 1.10.17A and B below. On February 6, 2006, Delek Automotive received an enhancement levy assessment from the local Regional Planning and Construction Committee (“the Committee”) in respect of grant of a building permit for the Logistics Center, in the amount of NIS 21.6 million. Delek Automotive paid half of the amount of the levy. On March 8, 2006 Delek Automotive submitted a counter-assessment to the Committee, arguing that the principal charge under the assessment should be billed not to Delek Automotive but to the Israel Lands Administration (“ILA”) pursuant to the guarantee made by ILA to Koor Properties Ltd. from whom Delek Automotive had purchased the land in 2000, (a transfer which was authorized by ILA on January 12, 2004). In the counter assessment Delek Automotive also disputes the amount of the enhancement levy arguing that it should be substantially lower than the original levy. Delek Automotive also submitted to ILA a demand for payment of NIS 16,248,000 for the above assessment pursuant to the above undertaking. In a letter dated February 28, 2006 ILA notified Delek Automotive that in 1996 ILA had made a provision to the Emek Lod Regional Council instead of the enhancement levy in the amount of 10% of the amounts paid to ILA for enhancement of the land, pursuant to the provisions of the Planning and Construction Law.

1 Based upon the reports published from time to time by the Automobile Importers Association.

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On February 17, 2008 a settlement agreement was signed between Delek Automotive and the Committee, whereby the enhancement levy is NIS 10 million at its value on the date on which Delek Automotive paid the Committee. Following this agreement, Delek Automotive, through its legal advisers, approached ILA requesting reimbursement of part of the enhancement levy it had paid. On December 8, 2008 a meeting on the matter was held with the CEO of ILA, but at the date of this report no decision has been made. In addition, Delek Automotive owns 78.5 dunams (gross) of land adjacent to the Logistics Center. Part of this land is expected to be expropriated for road-building. The leasing rights for 22 dunams have been extended until the end of 20521. The leasing rights for 41.5 dunams of the above land expired in 2002. After applications to ILA for an extension of the lease period which remained unanswered for a long time, Delek Automotive received a reply from ILA stating that Delek Automotive is required to cultivate the land for agricultural purposes. Delek Automotive complied with all ILA requirements, including payment of annual leasing fees and on May 15, 2009 ILA consented to the application subject to regulation of the rights of the previous owner who is no longer active. This matter is being handled by Koor from whom Delek Automotive purchased the leasing rights to an area of 15 dunams. Delek Automotive has leasing rights until 2042 for this area, with an option for a 49-year extension. This is the land that was used to build the central garage, to which Delek Automotive’s operation relocated from Holon in 2008. Following the settlement agreement between Delek Automotive and the Committee, on February 17, 2008 a Form 4 was issued for the central garage. The settlement agreement provides that once the original construction file is received from the police, the documents submitted for the Form 4 application will be reexamined, and if any contradiction is found, the Committee will decide on its steps without prejudice to the arguments and rights of Delek Automotive. The central garage has a business license through March 1, 2012. C. Under an agreement signed on January 28, 2008 between DMR Properties (1995) Ltd., a subsidiary of Delek Automotive ("DMR Properties") and Vitania Ltd. (“Vitania”),a subsidiary owned 48% by Delek Real Estate, of the first part (DMR Properties and Vitania in this section 1.10.7C are referred to as “the Buyer”), and a third party which is a company in voluntary liquidation (“the Seller”), the Buyer acquired title to a 5-dunam plot of land near Hamasger Street in Tel Aviv, including everything built on it and the building rights attaching to it ("the Plot”) for NIS 64 million (“the Purchase Agreement”), in equal parts and on the same conditions (50% each of the units of the Buyer). The Plot is designated for industry, high-tech industries and offices. According to the valid applicable Urban Building Plan, the Plot has building rights for 18,000 sq.m. gross (main areas and service areas). At the date of this report the Buyer is erecting an income-generating property called Mazda-Ford House on the Plot. This will include a showroom, and will be leased to DMR Properties or another subsidiary of Delek Automotive for its operations. On February 6, 2008, DMR Properties and Vitania entered into a cooperation agreement regulating the erection of an income-generating property together on the Plot and an adjacent plot, if acquired (“the Cooperation Agreement”). On the same date, a loan agreement was signed between DMR Properties and Vitania, in which DMR Properties undertook to grant Vitania a loan of NIS 32 million to finance the purchase of Vitania’s share in the Plot ("the Loan Agreement”). The loan will bear interest of prime + 1%, will be renewed every year, and will be repaid (principal and interest) within five years. The loan was granted to Vitania on November 19, 2008. The Cooperation Agreement and Loan Agreement were approved by the general meetings of Delek Automotive and Delek Real Estate after the addition of two amendments: the rent for the showroom would be determined on the basis of an estimate from a real estate appraiser who would be appointed with the parties' consent and would determine the appropriate rent on the basis of rental prices of similar properties in the area, and Delek Real Estate and/or its representatives would not participate in the negotiations between Vitania and Delek Automotive regarding the terms of the rental. 1.10.8 Intangible assets Delek Automotive has import concessions from Mazda and Ford, as described in sections 1.10.16A and 1.10.16B. Delek Automotive is materially dependent on these concessions.

1 The leasing rights were granted to Koor from whom Delek Automotive purchased the land. These rights will be registered in the name of Delek Automotive as soon as the registration of the transfer of leasing rights from Koor to Delek Automotive is completed. Delek Automotive’s application for transfer of the leasing rights from Koor is being handled by ILA.

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1.10.9 Human resources A. At the report date, Delek Automotive has 258 employees, divided into the following departments: Department No. of employees Management 7 Finance, IT, administration 25 Mechanics 66 Service 29 Sales 42 Logistics 49 Vehicle parts 40 Total 258

Delek Automotive is dependent on CEO Mr. Gil Agmon, inter alia because Ford has the right to terminate the Ford agreement if there is a change in the management of Delek Motors Ltd. (a wholly-owned subsidiary of Delek Automotive) (“Delek Motors”), i.e. if Mr. Agmon ceases to run Delek Motors and Ford did not consent to such a change (see section 1.10.16B). B. Benefits and the nature of those benefits in employment agreements As a rule, Delek Automotive employees, including senior officers, are employed under employment agreements. According to Delek Automotive policy and the Notice to an Employee (Terms of Employment) Law, 5762-2002, new Delek Automotive employees are furnished with a detailed written description of their employment terms when they start work. The employees receive all the rights to which they are entitled under Israel’s labor laws. Most Delek Automotive employees have senior employees insurance policies that include provisions for compensation and Delek Automotive's obligation for severance pay, as part of the terms of employment. Delek Automotive pays all its employees a bonus every year. In addition, since Delek Motors is a member of the Vehicle Importers Association, which is affiliated to the Chamber of Commerce Association, its employees are covered by a general collective agreement for import, export, service and trade sector employees from February, 21, 1977 (as amended on June 11, 1980 and October 27, 1983) signed by the Histadrut – Israel’s General Federation of Labor, the Tel Aviv-Jaffa Workers Council, and the Histadrut – Clerks Federation for Administration and Service Workers (“the Histadrut”) and the Tel-Aviv- Jaffa Chamber of Commerce. In addition, extension orders applied some of the provisions of the collective agreement to all employees in the import, export and wholesale trade sectors, and therefore, it appears that they apply to all Delek Automotive employees. Officers and senior management employees at Delek Automotive are employed under terms agreed with them, which include provisions for senior employees insurance. In addition, Rami Naor, deputy chairman of the board of Delek Automotive and a relative of the Group’s controlling shareholder, has made his services available to Delek Automotive. See details pursuant to Article 22 in Chapter D of the Periodic Report. For details of payments to the chairman of the board of Delek Automotive who also serves as chairman of the Company's board, see details pursuant to Article 22 in Chapter D of the Periodic Report. C. Training and instruction Delek Automotive holds regular training sessions for its employees, according to its needs and the employee’s function. Delek Automotive also sends its professional employees to trade fairs, seminars and workshops on relevant topics. D. Employee compensation plans Delek Automotive compensates its employees according to function and rank. The compensation is not part of the employment agreements and varies from year to year. E. Allocation of securities to senior employees 1. On January 9, 2006, Delek Automotive allocated 9,000,000 ordinary Delek Automotive shares to the CEO of Delek Motors, Gil Agmon, in consideration for NIS 255 million. At the date of this report, Mr. Agmon holds about 16.42% of the issued and paid-up share capital of Delek Automotive – about 15.99% at full dilution. For additional information regarding this allocation and a guarantee provided by Delek Investments to the CEO of

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Delek Motors for receipt of a loan to purchase the shares, see Note 13F7(b) to the financial statements. 2. On April 10, 2006, the board of directors of Delek Automotive approved a compensation plan for seven senior employees of Delek Motors, whereby 2,720,000 unlisted options were allocated, exercisable for 2,720,000 ordinary Delek Automotive shares, in accordance with Section 102(b)(1) of the Income Tax Ordinance (New Version), 5721- 1961, in an income track through a trustee appointed by Delek Automotive and approved by the tax authorities, according to the options plan for employees approved on February 9, 2006 which was presented for approval to the Income Tax Commission pursuant to provisions of the ordinance. These options were allocated to employees on June 6, 2006. For details of the exercise of the options in the reporting period, see section 1.10. Recognized expenses in Number of Value of the Delek Motors shares benefit of options financial exercisable granted under the statements for under the plan plan 2009 (NIS Summary of the terms of the plan (at full dilution) (NIS thousands) thousands) Grant of options to Delek Motors employees, exercisable in 4 equal 2,720,000 17,100 1,697 portions commencing April 10, 2008

1.10.10 Suppliers The vehicles and vehicle parts are supplied to Delek Automotive by Mazda and Ford, from their various factories around the world and at the manufacturers' discretion. Mazda products generally come from Japan, while Ford products generally come from Europe. Delek Automotive is dependent on these suppliers. In 2009 approximately 69% of the import value of vehicles and 50% of the import value of parts were from Mazda, with the remainder from Ford (31% and 50%). For a description of the agreements with Mazda and Ford, see sections 1.10.16A and 1.10.16B. Vehicles and vehicle parts are available within 90 days of the date of the order and in accordance with the work plan structured with each of the vehicle manufacturers. 1.10.11 Working capital A. Vehicle inventory policy Delek Automotive orders new vehicles from the car manufacturers about once a month, and the vehicles arrive in Israel two - three months later. Delek Automotive’s policy is to hold stock sufficient for an estimated three months. In 2008, vehicles were held in stock for an average of less than two months. However, toward the end of 2008, as sales slowed, the inventory period became longer. From the second half of 2009, the inventory period again averaged three months. B. Vehicle parts inventory policy The Commodities and Services Control (Vehicle Import and Servicing) Order, 5739-1978, obligates the supplier to supply transportation products for any vehicle model imported by the importer within seven days after receiving the order. However, the importer or its agent is protected if it proves that it complied with procedures for ordering the product from any possible source at the time, and that the delay was beyond its control, provided the product is supplied within 14 days. The vehicle parts inventory at Delek Automotive’s Logistics Center is based on the experience of Mazda, Ford and Delek Automotive regarding requirements for vehicle parts in the Israeli market. Vehicle parts are delivered about two - three months after being ordered. For immediate orders, when the part is not in stock, Delek Automotive orders the parts from the central parts facilities of Mazda and Ford in Europe and ships them to Israel by air. Therefore, in order to maintain inventory at the levels required to provide its customers with appropriate service, Delek Automotive uses a computer system based on statistical models which takes relevant parameters into consideration. Delek Automotive maintains a five-month inventory of parts.

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The vehicle parts inventory totals 50,000 items, which are valued at NIS 71 million in the financial statements at December 31, 2009. C. Warranty policy In addition to the manufacturer's warranty attached to the agreements, the manufacturers provide additional warranties as detailed in the warranty manual in each new car. Mazda and Ford provide a three-year or 100,000 km warranty for all their models, whichever comes first. In the agreements with the manufacturers, Delek Automotive undertook to implement or ensure that the Authorized Garages implement the warranty services as described in the warranty manual. According to the manual, Delek Automotive grants this warranty for all the vehicles it sells. Delek Automotive is entitled to reimbursement from the manufacturers for expenses incurred by supplying warranty services under the concession terms. Delek Automotive is under no independent obligation to provide a warranty for the vehicles, except for what is stated in the agreements with the manufacturers. Therefore, and based on its experience, Delek Automotive does not foresee any expenses due to this warranty and therefore has not made any provisions for warranties on its books. The manufacturer agreements describe the terms for reimbursing Delek Automotive for warranty services, and inter alia that Delek Automotive is required to report within 90 days on every repair effected under the warranty, and to keep the parts for up to 30 days after payment. In addition, the manufacturers may request the return of the faulty parts that were replaced. In the reporting year, there were no disputes with manufacturers in connection with these warranty services. For details of repairs carried out by the Authorized Garages under the warranty, see section 1.10.5D. Delek Automotive's trade license for transportation products specifies that the company is required to provide the buyer, at the time of the sale, with a warranty for the proper operation of the vehicle part as specified in the license for at least three months or 6,000 km, whichever is earlier. The warranty manuals provided with vehicles sold by Delek Automotive specify that Mazda and Ford provide a warranty for vehicle parts for six months or 10,000 km, whichever is earlier, from the date of its installation by a Delek Automotive Authorized Garage. D. Credit policy In the reporting year supplier credit averaged 210 days and Delek Automotive’s effective credit period given the cost of taxes on the import cycle (which it pays in cash) averaged 100 days. In 2009 the credit period from Mazda rose from 120 days to 240 days. The average credit given by Delek Automotive to its customers was 74 days. In the reporting year, credit terms for its institutional customers were changed as described in section 1.10.4A. In 2009 the average credit for customers in this segment totaled NIS 950 million and the average credit for suppliers in the segment totaled NIS 740 million. The change stems primarily from the tax component included in customer balances but not in the balance of overseas suppliers. The table below shows data for the average volume of credit and credit days for customers and suppliers (on an annual basis) in 2009 and 2008 (in NIS million and in days) respectively:

2009 2008 Volume Days Volume Days Customers1 950 74 785 58 Suppliers2 740 210 670 90 Suppliers - effective3 740 100 670 45

The difference in the volume of the credit stems primarily from the tax component, which is included in the customer credit but not in the credit of the foreign supplier. 1.10.12 Investments A. On July 1, 2004, DMR Properties, Delek Israel and Delek Real Estate established a partnership called Delek – Nir Zvi ("the Nir Zvi Partnership"). The shares of the partners in the partnership are

1 In 2009 (up to the report date) the credit terms for its institutional customers were changed as stated in section 1.10.4. 2 In 2009 Mazda increased the number of credit days from 120 to 240. 3 Delek Automotive pays import taxes in cash, and therefore the effective credit for suppliers is 100 days.

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DMR Properties (50%), Delek Israel (25%) and Delek Real Estate (25%). The Nir Zvi Partnership was established for the purchase (suspended) of 50% of the leasing rights in a 5-dunam plot adjacent to the plot on which the Group’s new Logistics Center at Nir Zvi is built, to allow convenient access to the Logistics Center of Delek Automotive (referred to in this sub-section A as “the Land”). The leasing rights were acquired under an agreement made on September 29, 2003 between the Nir Zvi Partnership (in establishment) and the Middle East Tube Company Ltd. (“Tubes”) (“the Purchase Agreement”) for NIS 6,013,000. The Nir Zvi Partnership has leasing rights in the Land through 2045, with an option for a 49-year extension1. According to the outline plan, applicable to the Land, part of the Land is defined partly as a storage area and partly as a private open area. Part of the area defined as a private open area is designated for expropriation for widening Road 44. To the best of Delek Automotive's knowledge, the Nir Zvi Partnership is initiating a change in the designation of the area for the establishment of a commercial center and gas station. The Purchase Agreement states that the Nir Zvi Partnership and Tubes will operate together to establish an economic joint venture on the Land, which includes a gas station and/or commercial center – "Power Center" – by means of a joint corporation or any other form of engagement between the Nir Zvi Partnership and Tubes, which will be registered in the name of both parties in equal parts. In addition, under the Purchase Agreement, if the access road is paved, and provided it serves as an access road to the Logistics Center, neither party may demand the dissolution of the partnership in the shared Land in a way that will compromise or restrict free passage on the access road, without derogating from the right to require dissolution of the partnership in any other way. In addition, a mechanism was defined for a right of first refusal for acquisition of the rights by one of the parties in half of the Land from the other party. It was also determined that if the partnership in the Land is dissolved, Tubes will not be entitled to terminate or prevent the continued use of the access road, with no time limit. The Nir Zvi Partnership is financed by a shareholders' loan and by external sources such as banks. Under the agreement between the partners in the Nir Zvi Partnership, if by December 31, 2009, the permits referred to in the agreement for establishing a gas station and commercial areas on the Land are not obtained and/or there is no agreement for operating the gas station by the fuel company, Delek Real Estate and Delek Israel are entitled, during one year from that date, to leave the partnership and receive from DMR Properties all their investments plus linkage differentials and 6% annual interest. Consequently, after Delek Real Estate notifies DMR Properties that it wishes to leave the partnership and get back its investment as described above, in January 2010 DMR Properties bought back from Delek Real Estate its share in the partnership and paid it NIS 2,101,000 for leaving the partnership. After transfer of Delek Real Estate’s rights in the partnership to DMR Properties, the latter will hold 75% of the rights in the partnership. The agreement between the partners in the Nir Zvi Partnership was approved at the general meeting of Delek Automotive on November 4, 2003. B. In April 2002, August 2003, and December 2005, Delek Automotive purchased shares in Mobileye N.V., constituting 3.35% at full dilution, for $7.2 million. The fair value at December 31, 2009 is approximately NIS 93 million, based on investments made in this company. Mobileye N.V. is developing an advanced sensor technology system for the automotive industry. C. In 2006 Delek Automotive acquired 2,200,000 Ford Motor Co. shares in consideration of US $15 million (NIS 70 million).The fair value of the shares at December 31, 2009 is approximately NIS 83 million, based on their stock exchange price. Ford Motor Co. is a public company whose shares are traded on the New York Stock Exchange and is the manufacturer of Ford vehicles. At the publication date of this report, the value of the Ford shares held by Delek Automotive is approximately NIS 92 million. 1.10.13 Financing A. Below is the average interest rate on loans from bank and non-bank sources that were in effect in 2009 and are not intended for the exclusive use of Delek Automotive2: Average interest rate Short-term loans Long-term loans Banking sources NIS credit Prime – 0.2% CPI-linked + 5.2% Credit in yen/euro/sterling LIBOR + 1.3% - Credit in USD LIBOR + 1% LIBOR + 1.8% Non-banking sources Prime – 0.3% 6.1%

1 These rights have not yet been registered in the partnership’s name in the Land Registry Office. Delek Automotive is dealing with the matter. 2 The average interest rate in the table is close to the effective interest rate.

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B. Credit limitations The limitations on the credit that Delek Motors receives from the banks is subject to the following financial covenants: 1. The adjusted equity1 at the end of each calendar year shall not be less than 20% of total assets for that year2. 2. Delek Automotive undertook towards one bank that its share in its total bank credit would not exceed 20% and that the ratio of bank credit to the balance sheet total would not exceed 55%. In addition, Delek Automotive undertook towards banks in Israel not to create liens on its property and assets in favor of any another person or entity and not to sell or transfer in any way (except by way of sales in the normal course of its business) its assets to a third party without the prior written consent of the banks. At December 31, 2009 and the publication date of this report, Delek Automotive was and is in compliance with these financial covenants. C. Between the balance sheet date and the date of the Periodic Report, the volume of bank credit from banking corporations fell by approximately NIS 100 million. D. Delek Automotive credit facilities and terms At December 31, 2009 and the date of the Periodic Report, Delek Automotive has credit facilities of NIS 1.425 billion. At December 31, 2009, Delek Automotive had used NIS 460 billion of this amount. The credit facilities were granted for one year. E. Variable interest credit Below are details of variable interest credit used by Delek Automotive at the balance sheet date: Basic interest rate Interest range in before report Change mechanism 2009 publication date Bank of Israel interest + 0.5% - 1.7% 1%

JPY LIBOR + 0.6%-1.5% 1.2%-1.5%

EUR LIBOR + 0.6% - 2% 1.2%-2.0%

USD LIBOR + 0.5% - 2.4% 1.2%-2.4%

F. Credit rating On February 17, 2004, Maalot Israel Securities Rating Company Ltd. (“Maalot”) announced that on February 11, 2004, its rating committee set a rating of AA for Delek Automotive liabilities, based, inter alia, on Delek Automotive's financial policy. On October 25, 2007, Maalot announced the validation of the existing rating. On February 7, 2010 Maalot notified Delek Automotive that its rating was being downgraded from AA to A+ mainly as the result of insufficient underwritten credit facilities. Since the company has no use for the rating and it sees no need for it in the foreseeable future, it asked Maalot to stop monitoring it. 1.10.14 Taxation A. Vehicles imported by Delek Automotive are subject to purchase tax. For details of the purchase tax reform, see section 1.10.1B.4. B. For details of the Ministry of Finance’s decision regarding the plan to increase the use value of company cars, see section 1.10.1B.3.

1 The letters of undertaking signed by Delek Motors are from the period in which financial statements were prepared in adjusted amounts. 2 Delek Motors undertook to one bank that its equity capital at the end of the quarter ending March 31, 2010 and for the subsequent periods, would not fall below 22% of its assets for that period. The Company is acting to obtain approval from said bank to change its undertaking to 20% of its assets for the relevant period.

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C. For details of the decision of the Ministers of Finance and the Environment regarding the government’s green taxation policy, see section 1.10.1B.5 D. Vehicles sold by Delek Automotive in Israel are subject to VAT at the rate applicable on date of the sale (until July 2009 the rate was 15.5%). From July until January 2010 the rate was 16.5% and since January 1, 2010 it is 16%. E. Vehicles imported from Japan are subject to 7% tax on the value of the vehicle. F. Delek Automotive pays the taxes listed in subsections A-E when the vehicles are released from customs. The sales prices of the vehicles take these taxes into account. G. For further details on taxation, see Note 43 to the Company’s financial statements. 1.10.15 Restrictions and supervision of Delek Automotive operations Below are the details of the legal restrictions and other legal arrangements relevant to a material part of Delek Automotive’s basic operations and which could affect them: A. Legislation in the vehicle import industry in Israel The Control of Commodities and Services (Vehicle Import and Servicing) Order, 5738-1978, states, inter alia, that no importer or agent may sell a new imported vehicle without a license from the competent authority. Delek Automotive has licenses for importing vehicles, valid through December 31, 2010. The licenses are granted for one year and are renewed every year. Delek Automotive also has special permits for importing original vehicle parts for Mazda and Ford vehicles. These permits are valid through July 14, 2010 and December 15, 2010, respectively. The order also states that the vehicle import license requires the holder to provide maintenance services through licensed service garages operating under the Commodities and Services Control (Vehicle Garages and Workshops) Order, 5730-1970, which also mandates at least one service garage in each of the following regions: Tel-Aviv, Jerusalem, Haifa and Beersheba, as well as one central garage (which may also be one of the regional garages). Delek Automotive has one central garage, as noted in section 1.10.2B, which the Motor Vehicles Department at the Ministry of Transport has certified as a garage for servicing Mazda and Ford vehicles. The permit for the service garage is valid through December 31, 2010. The vehicle import license also requires the holder to provide a warranty for maintenance services for at least two years after purchase. At least the first year must be under the manufacturer's warranty and the scope of the warranty terms will not be reduced throughout the entire period. The Order further stipulates that the importer is required to provide the customer with a signed certificate of warranty for the vehicle and its spare parts, in Hebrew, that includes the complete manufacturer's warranty. For Delek Automotive’s warranty policy, see section 1.10.11C. The Order imposes additional duties on the importer, including the marketing of transportation products and accessories at the four regional sales centers: Tel Aviv, Jerusalem, Haifa and the south, and the duty to supply transportation products within a given period (see section 1.10.11B). On February 15, 2010 the Knesset Economy Committee approved an amendment to the Order permitting the Parallel Import of vehicles into Israel, as described in section 1.10.1B.1. B. Price control There are no price controls for vehicles, spare parts and garage services. C. Business licenses Delek Automotive’s operations require a business license under the Business Licensing Law, 5728-1968. At the date of the report, Delek Automotive has licenses for all its operations. Trade in vehicles and vehicle parts requires a permit from the Ministry of Transport pursuant to the Commodities and Services Control (Manufacture of and Trade in Transportation Products) Order, 5743-1983. Delek Automotive has a valid license from the Ministry of Transport for trading in transportation products, valid through December 31, 2010. D. Antitrust Under Section 50B of the Restrictive Trade Practices Law, 5748-1988, which came into force on April 24, 2003, car importers are prohibited from restricting a service garage in the purchase or use of transportation products (as defined in the Order) except in the cases defined in the Order. In addition, if the vehicle importer offers warranties beyond the period required by law or beyond the period under the manufacturer’s warranty as provided on a global or regional basis, whichever is longer ("Additional Warranty”), the customer has the right to decide whether to purchase the Additional Warranty, and its value will be separate

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from the price of the vehicle. In addition, the importer may not restrict the warranty by limiting service to an authorized garage only, limiting the use of a specific transportation product, or limiting service to a specific garage or business except on the terms stipulated in the Order. In addition, according to the Order, the importer may not ask garages for information about the type or quantity of transportation products the garage uses in a certain period or for information about the type or amount of parts used – except when the information is required to investigate claims against the importer regarding its warranty for the vehicle and subject to the exceptions described in the Order. Under the Order, the importer may not limit the garages in the pricing of service they provide, except for a maximum price for servicing a vehicle under warranty. The Order also requires the importer to provide clear and relevant terms and criteria for granting authorized garage status. In accordance with the Order, Delek Automotive determined a list of terms and criteria and submitted this list to the Antitrust Commissioner. The Order also forbids receipt of an undertaking from the garage operator for exclusivity as detailed in the Order and subject to its exceptions. The Order was valid for five years and it expired on April 24, 2008. According to media reports the matter is still under investigation by the Antitrust Authority. 1.10.16 Material agreements The material agreements to which Delek Automotive is a party are these: A. Mazda agreement Delek Automotive has imported and sold Mazda vehicles and vehicle parts since 1992. Under an agreement from April 1, 2005 between Mazda Motor Corporation ("the Manufacturer”), Delek Motors and the Itochu Corporation (“the Exporter”) (“the Mazda Agreement”), the Manufacturer is committed to supply Delek Motors with specific Mazda models as detailed in the appendix to the above agreement,1 for the purpose of marketing and sales in Israel. Replacement parts for these vehicles are also part of the Mazda Agreement (“Mazda Vehicles and Parts”). Below is a summary of the main terms of the Mazda Agreement: The supply of Mazda Vehicles and Parts to Delek Motors pursuant to the Mazda Agreement will not prevent Delek Motors from purchasing other vehicles and vehicle parts from other suppliers for sale in Israel, provided such sale does not have a significantly adverse effect on the sale of Mazda Vehicles and Parts. The Manufacturer has sole discretion to determine whether the sale has a significantly adverse effect on the sale of Mazda vehicles. Delek Motors is required to inform Mazda of its intent to sell other vehicles or vehicle parts at least 90 days in advance. In addition, the Manufacturer is not prevented from selling vehicles or parts manufactured by other manufacturers to any other party in Israel. Notwithstanding the aforesaid, the Manufacturer has the right to sell Mazda vehicles in Israel through other parties as well, as specified in the Mazda Agreement. These parties include government bodies, the diplomatic corps, international bodies such as the UN, Japanese companies that purchase more than ten vehicles per year, companies controlled by the Manufacturer, their employees and others. Delek Motors may not sell, directly or indirectly, vehicles and vehicle parts outside of Israel. The Mazda Agreement has been extended through March 31, 2011. Vehicles and parts are ordered through specific agreements between Delek Motors and the Exporter, and between the Exporter and the Manufacturer. These agreements come into effect when the Manufacturer receives the order. The Manufacturer will make every effort to fill these orders, but it is not obligated to do so. Delek Motors undertakes not to use vehicle parts for any purposes other than to equip and service vehicles in Israel. Delek Motors is required to purchase a minimum number of vehicles each year, as detailed in the agreement.2 In 2009, Delek Motors met the minimum purchase commitments stated in the agreement and Delek Automotive believes that Delek Motors will also meet these

1 The appendix to the agreement is not updated; rather, the quantities and models ordered are agreed upon from time to time between the Manufacturer and the Exporter. 2 In a letter dated February 18, 2009, the Manufacturer confirmed that failure to comply with the minimum specified in the agreement in the fiscal year beginning April 2009 and ending March 2010, would not constitute grounds for termination of the agreement between the parties.

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commitments in 2010. The Manufacturer and Exporter may change the aforesaid number of vehicles subject to the consent of all the parties to the Mazda Agreement, in order to meet demands in the changing Israeli market and/or according to changes in the Manufacturer's business plan. If Delek Motors fails to purchase the minimum quantity defined in the Mazda Agreement, the Manufacturer is entitled to terminate the agreement immediately by written notice to Delek Motors and the Exporter. The Mazda Agreement sets the legal and business conditions relating to the distribution of Mazda Vehicles and Parts, including the establishment of a marketing and distribution system, implementation of marketing and sales activities, establishment of a service center for vehicles and a customer service management system. It also requires the establishment of storage facilities suitable for vehicles, provision of customer warranties according to the Manufacturer’s warranty, submission of regular reports to the Manufacturer and Exporter, non- disclosure agreements, safekeeping of intellectual property, and an arbitration mechanism for resolving problems between the parties, all as set forth in the Mazda Agreement. Each party is entitled to terminate the agreement at any time in writing to the other parties if one or the other is in breach of the agreement and does not remedy that breach within two months after notice was given. Each party to the agreement is entitled to terminate the agreement by written notice to the other parties in one of the following events as set forth in the agreement: foreclosure, bankruptcy, receivership, request for reorganization, insolvency, delay in payment, transfer of all or most of the business assets and liabilities of Delek Automotive, the freezing of Delek Automotive’s business, merger, and so forth. The Manufacturer is entitled to terminate the Mazda Agreement at any time by written notice to the Exporter and to Delek Motors, if the Manufacturer decides that it is unable to continue business with Delek Motors due to death, incompetence, disregard, or any change in Delek Motors' management or as a result of a change in the legal or organizational structure of Delek Motors or in the case of a material change in the composition of the company’s shareholders or investors. In the event where, as a result of force majeure (as defined in the agreement), any party to the Mazda Agreement is prevented from fulfilling its obligations for more than six months, any party to the agreement shall then have the right to terminate the agreement immediately by written notice to the other parties to the agreement. Under the Mazda Agreement, the Exporter and Delek Motors may not transfer their obligations and rights, in whole or in part, to any third party without the prior written consent of the Manufacturer. B. Ford agreement Delek Motors has been importing and selling Ford vehicles and vehicle parts since 1999, under an agreement signed on June 1, 1999 between Ford Motor Company (“Ford”) and Delek Motors (“the Ford Agreement”). The following are the main provisions of the Ford Agreement: Ford appointed Delek Motors as a non-exclusive authorized dealer in Israel of vehicles and parts made by or for Ford and of other products as determined by Ford from time to time. Delek Motors agreed not to act directly or indirectly for any other business enterprise and shall act solely as a Ford dealer unless Ford agrees otherwise in writing. Delek Motors undertook not to act in any way in the sale of new vehicles or parts of Ford’s competitors without prior written consent from Ford. In the agreement, Ford agrees that Delek Automotive be a concessionaire of Mazda products and defined rules for the integration of Mazda and Ford concessions in Israel. Any change in the control of Delek Motors or any change in the management of Delek Motors wherein Gil Agmon will no longer run the company requires the prior written consent of Ford. In the event that Ford does not agree to such change, Ford is entitled to terminate the Ford Agreement. The Ford Agreement remains in effect from the date of its execution until it is terminated by one of the parties in accordance with its provisions. The Ford Agreement stipulates the business and legal conditions for distribution of Ford products by Delek Motors in Israel, including marketing and distribution operations,

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establishment of a service system that complies with Ford standards, employment and training of suitable human resources, provision of warranties for Ford products, maintenance and repair services, the use of trade names and trademarks, and an arbitration mechanism for resolving disputes between the parties. Delek Motors has the right to terminate the Ford Agreement at any time by giving at least 30 days' written notice. Ford has the right to terminate the Ford Agreement without notice should any of the events listed in the agreement occur which are in Delek Motors' control. These events include transfer by Delek Motors of the rights or obligations under the agreement; transfer of any material assets owned by Delek Motors that are required for running its business; change in the ownership or management of Delek Motors without Ford's prior written consent; discovery that Delek Motors made false representations when entering into the agreement; insolvency of Delek Motors; improper conduct of Delek Motors during regular business practices; failure of Delek Motors to stay open during regular business hours as defined in the agreement; a court conviction of Delek Motors, Delek Automotive, Yitzhak Sharon (Teshuva) or Gil Agmon for violation of the law; disagreement between the parties which Ford believes could have an adverse effect on the business of Delek Motors, or the reputation or goodwill of Delek Motors or of Ford of other authorized agents of Ford, its associates or its products; or non-agreement between the above parties which Ford believes could have an adverse effect on the businesses of Delek Motors, its reputation or that of Ford or of its associates; a breach of certain parts of the agreement by Delek Motors; non-payment or late payment to Ford or a Ford company after prior notice was given and the breach was not corrected within 15 days; suspension or revocation of Delek Motor’s operating license for any reason whatsoever. In addition, Ford has the right to terminate the Ford Agreement by giving 60 days' notice if Delek Motors fails to fulfill its undertakings in accordance with the agreement and does not remedy the breach within the 60-day notice period. Ford and Delek Motors both have the right to terminate the Ford Agreement by giving 15 days' written notice in the event of the death, physical disability or mental incompetence of the aforementioned owners of Delek Motors, provided that Ford suspends this right for a period of three months to one year if their successor or legal representative asks Ford to do so and Ford is convinced, to its satisfaction, that he or she is able to comply with the terms of the Ford Agreement. Ford has the right to terminate the Ford Agreement at any time by giving at least 120 days' written notice. Ford has the right to terminate the Ford Agreement at any time by giving at least 30 days' notice if Ford offers a new agreement or an amended version of the agreement to its authorized dealers. If the event of a change in the ownership of Delek Motors or if most of the assets of Delek Motors are transferred to any other party, which requires Ford to negotiate a new agreement with that party, Ford shall have a right of first refusal to purchase Delek Motors or the assets offered for sale on the same conditions as agreed by that party. Ford has the right to assign its right of first refusal to a third party. The right of first refusal can be enforced for any transferee of Delek Motors. 1.10.17 Legal proceedings A. On January 10, 2006 a complaint was filed in the Petach Tikva Magistrate’s Court against DMR Properties, Delek Motors and officers of those companies for unlawful construction and use of the land at the Nir Zvi Logistics Center, after prior proceedings from 2005 were cancelled. On January 2, 2007 the indictment concerning the officers who were included in the original indictment was cancelled. The arguments in the statement of claim challenge both the legality of the building permits granted by the local committee, since they contradict the permitted use designated in the plan for the land and the fact that were granted without an application for exceptional use, as well as the actual construction and use which are contrary to the permits. The amended indictment accuses DMR Properties and Delek Motors of construction on the land and its use without a building permit, where the construction and use deviate from the plans and permits. In the first hearing of the indictment the companies denied the accusations. In a procedural arrangement reached with the prosecution, the prosecution reserved the right to apply for a cease and desist order for the works in the future, as part of the decision that will be given in the case. On July 23, 2008 the court acquitted Delek Motors

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and DMR Properties of the offense of unlawful use of the land. In a plea bargain between the parties which was validated as a judgment on March 29, 2009, DMR Properties and Delek Motors admitted to the violation of deviation from the permit and were charged accordingly, and were acquitted of the other offenses listed in the indictment. DMR Properties and Delek Motors were fined NIS 50,000. The plea bargain further stipulated that the plaintiff would not impede the construction, population and use of the land for the Logistics Center. B. On September 4, 2007, Israel Police questioned Gil Agmon, CEO of Delek Automotive and Delek Motors, and Yoram Mizrachi, deputy CEO of Delek Motors, on suspicion of bribing an engineer on the Lodim Local Planning and Construction Committee and false record in a corporation's documents, in connection with the construction of the Logistics Center at Nir Zvi. The CEO and deputy CEO were detained after questioning and brought before the Magistrate’s Court in Ramla for extension of arrest, at the request of the police. The suspects denied all the allegations against them and their arrest was first extended by two days, following which they were released to house arrest for another four days. As part of the conditions for their release, the suspects signed a bond for NIS 50,000, posted a financial bond of NIS 50,000 and a third-party bond of NIS 50,000. One year after the investigation the court canceled all the bonds against the suspects and the money deposited for release on bail was returned. With the exception of the foregoing, Delek Automotive has no further information about this investigation, and it is unable to estimate, at this stage, the impact of the investigation on the financial situation of Delek Automotive, if any. Delek Automotive believes that the investigation will reveal that the suspicions against these officers are unfounded. C. On June 26, 2002 a claim was filed in the Jerusalem District Court for permanent relief and temporary relief by the former Ford Parts Israel Ltd., petitioning against Ford to allow the petitioner to continue the vehicle parts agency, against Delek Motors and Ford – to refrain from operations to remove the petitioner from the market, in violation of the antitrust law, and against Delek Motors – to refrain from marketing original vehicle parts to the petitioner’s customers and to refrain from predatory pricing. As part of the lawsuit, Delek Motors was accused of performing and intending to perform unjust competition in the original parts market. The petitioner filed for a temporary order, which was dismissed after hearing the parties. At the same time, Ford's petition for a stay of proceedings, claiming foreign jurisdiction, was investigated and allowed and Ford was removed from the proceedings. Based on the opinion of its legal advisers, Delek Automotive believes that it has meritorious arguments in its defense against the motion and against the injunctions and permanent mandamuses. D. On May 4, 2008 several shareholders in the Yael Transport Cooperative for Discharged Blind Soldiers ("the Association") filed a derivative action on behalf of the Association against the majority shareholders in the Association and against other defendants, among them DMR Properties and Delek Real Estate. The action alleges, inter alia, that DMR Properties and Delek Real Estate entered into agreements with the defendants, the majority shareholders, in respect of the Association’s rights in the Lapid Compound in Jaffa ("the Lapid Compound"), when the Association was a protected tenant in the Compound, despite the fact that they knew that they had no authority to do so, and they knew that these agreements contradict the only valid agreement signed by the Association. In the period relevant to the case, DMR Properties and Delek Real Estate had ownership rights (which have since been sold) in part of the Lapid Compound through a partnership registered under the name “Delek Lapid”. In the above complaints the plaintiffs are requesting that the court declare and determine cancellation of the agreement signed between the parties involved, including with DMR Properties and Delek Real Estate, and return of the land in the Lapid Compound that allegedly used to belong to the Association. The statement of defense on behalf of DMR Properties and Delek Real Estate was filed on September 1, 2008 and contains an application to the court, inter alia, to dismiss the claim for the main reason that the plaintiffs in fact have no cause of claim or privity in contract against DMR Properties and Delek Real Estate. The agreements that were signed were lawfully signed and in fact deal with a claim between the shareholders and rights holders in the Association – a claim in which Delek Real Estate and DMR Properties have no prima facie interest. At the reporting date the other parties are filing various applications in which DMR Properties has no direct interest. Delek Automotive believes, based on its legal advice, that the likelihood of the case against DMR Properties and Delek Real Estate being allowed, is negligible. 1.10.18 Objectives and business strategy The primary goal of Delek Automotive is to increase its operations and profits through continued improvement of service. In recent years Delek Automotive has taken a number of measures to

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achieve these objectives, among them concentrating Delek Automotive’s facilities in the Logistics Center in Nir Zvi and upgrading the authorized garages – service centers, a process which is now coming to an end (see section 1.10.5C). Instead of these objectives, in the coming years Delek Automotive is expected to embark on new activities in customer service as well as in training and professional standards of its nationwide sales and service array. 1.10.19 Expectation for developments in the coming year In 2010 Delek Automotive is expected to launch a Mazda2 sedan. Delek Automotive will use this model to penetrate a new market segment (the family mini segment). Toward the end of 2010 Delek Automotive is planning to launch the new model of the Mazda5 which will replace the new successful model [sic]. 1.10.20 Risk factors A number of risk factors could threaten the operations of Delek Automotive:

A. Dependence on manufacturers: Delek Automotive is dependent upon the manufacturers of the cars it imports. According to agreements with the manufacturers, Delek Automotive is required to comply with certain conditions. The Ford agreement is unlimited in time and can be terminated as described in section 1.10.16B, while the Mazda agreement is valid for three years as noted in section 1.10.16A. In addition, the parties may terminate these agreements as provided therein. Non-renewal or termination of the agreements will have a material impact on the operations of Delek Automotive. In addition, Delek Automotive is dependent on the manufacturer’s models and pricing structure. If the manufacturer produces more expensive models, this could affect the financial results of Delek Automotive. Furthermore, given the global economic crisis which is affecting the car manufacturing industry, if one of the manufacturers whose vehicles are imported by Delek Automotive were to halt its operations, this could have a material effect on the business of Delek Automotive. B. Changes in the exchange rates of importing countries: Most of Delek Automotive’s expenses are in foreign currencies – JPY, EUR and USD, and therefore it is exposed to fluctuations in the currency exchange rates. Revaluation against the shekel could result in a decline in the profitability of Delek Automotive. C. Changes in foreign currency rates relevant to competitors: The exchange rate component in the price of Delek Automotive products is 85-90% of the selling price of those products. Therefore, if foreign currency exchange rates relevant to the competitors remain unchanged or depreciate, while currencies relevant to Delek Automotive appreciate, the competitive ability of Delek Automotive will be impaired. D. Changes in bank interest rates in Israel and abroad: A large part of Delek Automotive’s bank credit is at variable interest, which is a function of bank interest in Israel and abroad. Therefore, Delek Automotive is exposed to changes in the bank interest in Israel and abroad. E. Difficulties in obtaining bank financing as a result of the global economic crisis – In view of the global economic crisis which erupted at the end of 2008 and which caused the collapse of some global banks and investment houses, Israeli banks tightened their financing requirements. In addition, since Delek Automotive is part of the Group, it is subject to the “single borrower” restriction which is liable to limit its sources of bank credit. F. Customer credit: Delek Automotive’s sales to institutional customers are partially accomplished using credit, as is common in the automotive industry. The credit is not fully secured and is concentrated among a few customers with a large volume of sales. Therefore, failure by one or more customers to repay the credit can specifically affect Delek Automotive’s cash flow and business results. At December 31, 2009, NIS 1,250 million of the total customer debt is concentrated among six customers of which two are controlled by the same entity, and NIS 922 million is concentrated among three customers two of which are controlled by the same entity. At December 31, 2009 approximately 50% of customer debt is not secured and the balance is secured by a partial lien (see section 1.10.4A). G. Reducing centralization in the vehicle market: As described in section 1.10.1B, the Ministries of Finance and Transport are taking steps to reduce centralization in the vehicle market in Israel and to remove market barriers by examining tax reforms, standardization and regulations for vehicle imports. Delek Automotive estimates that in the short term, these changes will not have a material effect on the Group’s operations, since Parallel Imports are not economically viable except for luxury and niche cars.

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H. Competition in the sector of operations of Delek Automotive: As described in section 1.10.6, Delek Automotive faces competition in the segments of its operations. If new models are introduced into the segments in which Delek Automotive operates and compete with the models sold by Delek Automotive, or if these models are sold at competitive prices, this competition could affect the results of Delek Automotive. In addition, there is intense competition in the vehicle parts market, which could affect the results of Delek Automotive in this segment. Furthermore, in recent years, hybrid vehicles combining an internal combustion engine with an electric motor have been introduced into the market and this could lead to a fall in gasoline consumption. In the family category, prices of these hybrid vehicles are significantly higher than the prices of the cars sold by Delek Motors and so they do not constitute significant competition for Delek Motors. Moreover, entities in the automobile market have recently been developing electric cars. Delek Automotive does not anticipate material expansion in this segment in the near future. I. Economic slowdown in the Israeli and/or global market:: Changes in the scope of economic activity in Israel resulting from political, security and economic factors could affect the volume of vehicle sales in Israel and have a negative impact on the business results of Delek Automotive. However, in recent years, despite the economic slowdown in the Israeli market, Delek Automotive has successfully established its position as the largest car agency in Israel. Between the last quarter of 2008 and the reporting date the economic slowdown in the Israeli economy caused by the global economic crisis has been of a severity not witnessed for decades. This slowdown, combined with forecasts of falling prices (see section 1.10.1C), resulted in a significant decrease in vehicle deliveries in the last quarter of 2008, a trend which continued in the first half of 2009 and was halted in the second half of the year. The slowdown could also raise customer credit risk levels and thus have an adverse effect on the profitability of Delek Automotive, caused both by a decline in sales and larger price reductions. J. Regulatory changes: Changes in regulatory arrangements that apply to the vehicle industry, such as changes in the government taxation policy, changes in policy for classifying vehicles as private or commercial for tax purposes, or changes in the policy for the use value of a leased vehicle for employee use, could lead to a change in the demand for various types of vehicles and affect the results of Delek Automotive’s operations. For details of these changes, see section 1.10.1B. K. Changes in the management or control of Delek Motors: Under the Ford agreement, any change in the control or management of Delek Motors whereby Gil Agmon will no longer run the company, requires the prior written consent of Ford. If Ford does not consent to this change, Ford shall have the right to terminate the concession (see section 1.10.16B). In addition, Ford has the right to terminate the agreement, inter alia, if the court convicts Delek Motors, Delek Automotive, Yitzhak Sharon (Teshuva) or Gil Agmon of violation of the law or any other action unbecoming for reputable business executives. Furthermore, under the Mazda agreement, the Manufacturer is entitled to terminate the agreement at any time by written notice to the Exporter and to Delek Motors, if the Manufacturer decides that it is unable to continue business with Delek Motors because of death, incompetence, disregard or any change in Delek Motors management or as a result of a change in the legal or organizational structure of Delek Motors or in the case of a significant change in the composition of the company’s shareholders or investors. Below is a summary of risk factors by type (macro risks, industry-wide risks and risks –specific to Delek Automotive), rated according to the estimates of Delek Automotive's management by the degree of impact on Delek Automotive's business: major, medium or minor impact.

Impact of risk factors on company operations Major effect Moderate effect Minor effect Macro risks • Changes in the • Economic slowdown in • Changes in bank exchange rates of the the Israeli and/or interest rates in Israel currencies of the global market and abroad importer countries • Difficulty in obtaining bank financing Industry-wide risks • Changes in rates of • Customer credit • Reduction of market currencies used by centralization competing importers • Competition in Delek Automotive’s segments of

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Impact of risk factors on company operations Major effect Moderate effect Minor effect operations • Regulatory changes Risks specific to • Dependence on • Change in the • Delek Automotive manufacturers management or the control of Delek Automotive

The above analysis of the risk factors is based exclusively on estimates, and the actual effect might differ.

1.11 Energy1

1.11.1 General information on the segment of operation A. Delek Energy’s energy segment operates primarily under Delek Energy Systems Ltd., a public company whose shares have been listed on the TASE since 1982 (“Delek Energy”). B. Delek Energy is engaged, through partnerships and subsidiaries, in oil and gas exploration and production in Israel and other countries. Gas is produced at the Yam Tethys project in the Mediterranean Sea off the shores of Israel, and oil and gas are produced in Southern USA through Elk Resources LLC ("Elk"). There are oil and gas explorations in assets in Israel, USA, and the North Sea, and through Matra Petroleum Plc. (“Matra”) in Russia. Delek Energy holds 25.12% of the shares of Viking Oil and Gas International Ltd. ("Vogil") which holds shares in Nexus Energy Ltd., (“Nexus”) an Australian public company involved in exploration and production of oil and natural gas. At the date of this report, the Yam Tethys project produces most of the Company’s revenue. Other key projects are the development of the gas discovery at the Tamar and Dalit sites ("the Tamar Project"), offshore exploration efforts in oil rights off the coast of Israel, and production, development and exploration at oil assets in the USA. C. Segment of operation: structure and changes 1. Operations in Israel: Delek Energy operates in Israel through its holdings in the limited partnerships Delek Drilling (“Delek Drilling Partnership”) and Avner Oil Exploration (“Avner Partnership”). The Delek Drilling and Avner partnership are referred to collectively in this section as “the Partnerships” or “the Limited Partnerships”. In addition to managing the Partnerships, Delek Energy holds participation units issued by the limited partners in the Partnerships as follows: • Direct and indirect holding of 62.32% of participation units issued by the limited partner of Delek Drilling Partnership (“Delek Units”). The partner and trustee of this partnership is Delek Trustees Drilling Ltd., wholly owned by Delek Energy. The holdings in the partnership do not confer any management rights on Delek Energy. • Direct and indirect holding of 45.55% of participation units issued by the Avner partnership (“Avner Units”). The partner and trustee of this partnership is Avner Trustees Ltd., owned 50% by Delek Energy. The holdings in the partnership do not confer any management rights or profit-sharing rights on Delek Energy. It is noted that Delek Investments directly holds 6.95% of Delek partnership units and 13.26% of Avner partnership units. The primary operations of the Partnerships currently focus on supplying natural gas from the Ashkelon lease (Mari reservoir), promoting the development plan at the Tamar and Dalit leases and exploration efforts under licenses in which the Partnerships hold rights. The Yam Tethys project includes two oil leases (Ashkelon and Noa) in the Mediterranean Sea off the shores of Israel, where commercial gas reservoirs have been found. In 2004, the partnerships started selling natural gas produced from the Mari reservoir in the Ashkelon lease, and Delek Energy started recognizing significant revenues as a result. Delek Drilling partnership, Avner partnership and Delek Investments hold 25.5%, 23%

1 For definitions of some of the professional terms used in this section, see the glossary at the end of the chapter.

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and 4.441%, respectively, of the Yam Tethys project and of Yam Tethys Ltd., which owns the license to construct and operate a natural gas pipeline. In addition, Delek Drilling Partnership, Avner Partnership and Delek Investments hold 48.17%, 43.44% and 8.39%, respectively, of Delek and Avner – Yam Tethys Ltd., which was incorporated by the Israeli partners in the Yam Tethys project in order to issue debentures to institutional investors in the USA. For further details of the Yam Tethys project, see section 1.13.2. The Partnerships hold equal shares (15.625% each) of the Tamar Project, under which the gas discoveries were made (see section 1.13.3). In addition, the Partnerships conduct other oil and gas exploration operations in Israel, as described in section 1.13.4.1 2. Operations abroad: Overseas operations are carried out through Delek Energy International Ltd., a wholly owned subsidiary of Delek Energy Systems Ltd., incorporated in Israel ("Delek Energy International"), which holds rights in the following companies and projects: A) 29.14% in the shares of Matra, a public company listed in the UK, with rights in an exploration project in Russia B) 25.12% of the shares in Vogil, a private company listed in the Virgin Islands, which owns shares in Nexus and two oil tankers2. C) Delek Energy Systems US Inc., a wholly owned subsidiary of Delek Energy International, incorporated in the USA (Delek Energy USA), holding (i)rights in oil assets in Southern USA, including exploration and production fields; (ii) 50% of the exploration and production rights of natural gas in the Wise oil project in Texas; (iii) the full share capital of Delek Energy Systems (Rockies) LLC, holding the full share capital of Elk, which holds oil and gas exploration and production rights in Utah and New Mexico, USA. D) Delek Energy Systems (Gibraltar) Limited, a wholly owned subsidiary of Delek Energy International, incorporated in Gibraltar (Delek Gibraltar), which has rights in an exploration project in the North Sea E) Delek Energy International held operations in Vietnam and in Guinea-Bissau, which were sold during the course of 2009. For further information see sections L.3 below. D. Delek Energy’s investments in its operations3 1. Below is a description of Delek Energy’s main investments (over $1 million a year) in oil and gas exploration and production projects in 2009-2008 (in NIS thousands), including amounts charged to profit or loss:

Operation 2009 2008 AriesOne, USA 3,656 2,936 Elk – USA 82,036 502,633 Gas exploration rights in Wise County, USA (Alvord) 440 --- Vietnam (including capitalized credit costs) 44,283 183,256 Guinea-Bissau 1,922 107 North Sea --- 23,447 Yam Tethys 53,523 36,721 Tamar and Dalit leases 139,131 42,104 Other 19,581 143 Total 350,604 791,347

1 The partnerships are taking steps to change the TASE bylaws so that it will allow limited partnerships involved in oil or gas exploration to also take part in explorations in Cyprus (see section 1.13.3K below). 2 For further information pertaining to exercise of the bank's rights and seizure of tankers see section 1.11.8B below. 3 The table refers to Delek Energy's relative share in the investment. For information pertaining to Matra and Vogil, see sections 1.13.7A and 1.13.8, respectively.

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E. The Group's main holding structure in this sector:1 * The rate of holdings in the limited partnerships are of the participating units in the limited partner.

1 The chart does not include Delek Drilling Trusts Ltd. and Avner Trusts, nor does it include the subsidiaries of Elk, Vogil or Matra.

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As at the report date, the Limited Partnerships hold rights in the following oil assets in Israel:1

Offshore/ Share of Share of Right Area in onshore Delek Drilling Avner Right valid Other owners apart from ID Name type km asset partnership partnership until2 partnerships Operator 7/I Noa Lease 250 Offshore 25.50% 23.00% 31.1.2030 Yam Tethys project partners3 Noble 10/I Ashkelon Lease 250 Offshore 25.50% 23.00% 10.6.2032 Yam Tethys project partners Noble I/12 Tamar Lease 250 Offshore 15.625% 15.625% 1.12.2038 Tamar Project partners4 Noble

I/13 Dalit Lease 250 Offshore 15.625% 15.625% 1.12.2038 Tamar Project partners Noble 321 Zerach (Tzuk License 16.5 Onshore 25% 25% 31.12.2009 Zerach Israel Oil Exploration Ltd.; Avner Oil and Tamrur Enclave)5 Gas Ltd. 327 Zurim Halamish License 34.5 Onshore 25% 25% 31.12.2010 Ginko Oil Exploration Limited Avner Oil and Enclave6 Partnership Gas Ltd. 331 Ohad License 400 Offshore 50% 50% 30.6.2010 --- Avner Oil and Gas Ltd. 337 Avia License 400 Offshore 50% 50% 9.6.2010 --- Avner Oil and Gas Ltd. 338 Keren License 400 Offshore 50% 50% 9.6.2010 --- Avner Oil and Gas Ltd. 358--363 Ruth licenses7 License 2,400 Offshore 27.835% 25.106% 29.2.2012 Noble Noble 364-368 Alon licenses8 License 2,000 Offshore 26.4705% 26.4705% 29.2.2012 Noble Noble 349-353 Ratio licenses9 License 1,700 Offshore 22.67% 22.67% 14.12.2011 Noble, Ratio Noble

1 Each of the partnerships has the option to receive 15% of the exploration and production rights in Cyprus (see section 1.13.3K below). Furthermore, the partnerships are negotiating with Petromed Corp. to acquire rights in the347/Mira and 348/Sara licenses and the Benyamin/199 preliminary permit. At the date of the report, a contract has not been signed and it is uncertain whether it will be signed. 2 Subject to terms prescribed in the Petroleum Law and regulations and/or asprovided in the terms of the oil rights 3 See section 1.13.1.D(1). 4 The Tamar project partners are: Noble – 36%; Isramco Negev 2 Ltd. Partnership ("Isramco") – 28.75%; Delek Drilling partnership– 15.625%, Dor Gas Exploration Ltd. Partnership ("Dor Gas") – 4%. 5 These rights are limited partnership rights in the Tzuk Tamrur enclave, which is an enclave in the license area. The partnerships each own 22.386% of the rights in Tzuk Tamrur 3 drilling (see section 1.13.3B). 6 These rights are participation rights in Halamish enclave, which is an enclave within the license area (see section 1.13.3B(3)). 7 358/Ruth A, 359/Ruth B, 360/Ruth C, 361/Ruth D, 362/Ruth E, 363/Ruth F licenses ("Ruth Licenses") granted in lieu of 197/Ruth preliminary permit 8 364/Alon A, 365/Alon B, 366/Alon C, 367/Alon D, 368/Alon E, 369/Alon F licenses ("Alon Licenses") granted in lieu of 198/Alon preliminary permit 9 349/Rachel, 350/Amit, 351/Hannah, 352/David, and 353/Eran licenses were granted in lieu of 193/Ratio Yam preliminary permit

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F. For details of natural gas production at Yam Tethys project, see section 1.13.2. G. At the report date, companies held by Delek Energy hold rights in the following oil assets outside Israel:1

Name Area in km Onsho Name of Share in Other partners Operator re/offs owner asset hore Elk 225 (net) Onsh Elk 32.5% - Varies from one Elk ore 100%9 asset to another Two Guinea- 4,900 Offsh Delek Energy 21.4286% Svenka Petroleum Svenka Bissau ore International Exploration AB Petroleum concessions – Exploration AB Esperanca and Sinapa AriesOne 402 (net) Onsh Delek Energy 83.49%3 Aries Resources, Aries partnership ore USA LLC Resources LLC Alvord areas in 11 (net) Onsh Delek Energy 50% Jay Petroleum LLC Jay Wise county, ore USA Management Texas Company LLC North Sea Block 22 Offsh Delek Energy 25% Noble Energy Noble Energy 21/20f ore Gibraltar (Oilex)Limited; (Oilex) Limited Dana Petroleum Two Guinea- 4,900 Offsh Delek Energy 21.4286%4 Svenka Petroleum Svenka Bissau ore International Exploration AB Petroleum concessions – Exploration AB Esperanca and Sinapa

H. Oil and natural gas exploration and production operations are complex and dynamic, involving considerable costs and extremely high uncertainty as to exploration cost, schedule, presence of oil or natural gas and production ability while maintaining economic viability. As a result, despite considerable investments, often drillings do not achieve positive results and do not yield any revenue, resulting in the loss of part or all of the investment. Exploration and production of oil and natural gas are usually undertaken by joint ventures involving multiple partners that sign a joint operation agreement (JOA) whereby one of the partners is appointed to operate the joint venture (for a description of the JOA, see the Yam Tethys operating agreement in section 1.13.2F). The oil and natural gas exploration and production process in any concession involves several stages, including the following: 1. Preliminary analysis of geological and geophysical data for selection of areas showing potential for oil and gas exploration 2. Consolidation of a lead for drilling. 3. Seismic surveys, which assist in locating geological formations that may contain hydrocarbons (oil and/or gas) and processing and analysis of the data. 4. Examination of the geological formations and preparation of viable prospects for exploration. 5. Decision to conduct exploration drilling and preparation for drilling.

1 Further to the foregoing, the Company has shares in Matra and Vogil (see sections 1.13.7A and 1.13.8 below). below. Delek Energy International signed a contract to transfer its rights in two offshore concessions in Guinea- Bissau.

2 It should be noted that there are numerous small fields that are not joined to one another. Furthermore, the size of the field was measured in accordance with the fields held by AriesOne. As at December 31, 2009, the transfer agreement has not yet been carried out. As at the reporting date, the size of the fields that were transferred to Delek Energy have yet to be measured in accordance with the transfer agreement. See section 1.13.5A below.. 3 The share of AriesOne partnership in most areas is less than 100% (see section 1.13.4A). 4 The national oil company of Guinea-Bissau has a purchase option, in the event of a commercial discovery, for 30% of the project rights. If the option is exercised, the share of Delek Energy International will be reduced to 15% of each of the rights.

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6. Contracting with drilling contractors and receipt of accompanying services 7. Exploration drilling including logs and other tests. 8. Production tests (in certain cases). 9. Final analysis of drilling results, and in the event of a discovery, based on an initial estimate of reservoir properties and quantities of oil and/or natural gas reserves, analysis of economic data (including market assessment) and physical data, an initial assessment of development format and cost is prepared. Further seismic surveys, confirmation drillings and appraisal wells may be required in order to form a better assessment of the reservoir properties and quantities of oil and/or natural reserves. 10. Consolidation of a development plan and preparation of a detailed economic plan for the project. 11. Final analysis of the data and decision whether the discovery is commercial. 12. Development and production works of the commercial discovery. 13. Production of the commercial discovery. These stages do not exhaust all the stages of the exploration and production process in a specific project, which due to its quality and nature could include only part of these stages and/or additional stages and/or stages in a different order1. It is noted that the commercial nature of an oil and/or gas discovery is complex and depends on many diverse factors. In this context, there is a significant difference between an offshore discovery, which requires extremely high development costs, and an onshore discovery, and between an oil discovery and a gas discovery, whose viability depends on the ability to sell the gas to an attractive target market, as gas, unlike oil, is not a commodity sold at uniform prices in all countries. Furthermore, the commercial nature of the oil discovery is greatly affected by global oil prices. For example, a discovery that is not commercial when a barrel of oil costs $20, could become commercial when the price increases to $80. In other words, an oil and/or gas discovery that is not commercial under certain market conditions may become commercial in the event of material changes in market conditions, and vice versa. Concurrently with the aforementioned operations, and in particular in the event of a commercial discovery, exploration operations sometimes continue in adjacent areas. Sometimes no drill-worthy formations are found, therefore preparation of a prospect for drilling is not viable and the process is terminated earlier. Furthermore, sometimes an oil and/or natural gas discovery turns out to be a non-commercial and therefore not worth development and production. Moreover, the duration of each stage varies according to the nature of the project and it is difficult to demonstrate an exploration, development and production process in which all the above stages are conducted continuously in the abovementioned order and with no changes and unexpected events. Onshore and offshore oil and gas exploration and production processes are essentially the same. The difference is in technology and costs, which are typically considerably higher offshore than onshore. I. Limitations, legislation, regulations and special constraints: Oil and gas exploration and production are subject to extensive regulation by the host countries. For details of regulations applicable to Delek Energy’s operations, see section 1.13.24. J. Technological developments in the operating sector: In recent decades, there have been technological developments in oil and natural gas exploration and production, relating to tests as well as drilling and production methods. These technological developments have improved the data available for oil and gas exploration, enabling earlier identification of potential oil and gas reservoirs, which may also reduce the risks involved in drilling operations. In addition, these developments will improve drilling operations. Technological improvements allow operation under much more difficult conditions than before, further offshore and at a greater depth. Accordingly, oil exploration companies are able to invest exploration efforts in areas where drilling used to be impossible, or was only possible at a very high cost and much greater risk

1 Thus for example in the case of the Tamar and Dalit drillings the operator announced the commercial discover before the assessment drilling and formulated a development plan

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K. Critical success factors in the operating sector: Locating and obtaining exploration rights (by purchasing or joining) in areas showing potential for commercial discovery; ability to raise considerable financial resources; using state-of-the-art technologies (such as 3D seismic surveys and cutting-edge data processing processes) for locating and preparing prospective drillings and for formulating offshore development plans; partnering with highly experienced international concerns operating in the sector for complex drilling, using their professional know-how and sharing their investment costs; successful exploration operations. L. Entry and exit barriers: The major entry barriers in the exploration sector are the permits and licenses required for oil exploration, the proof of financial stability required to obtain them, as well as major investments at relatively high risk levels involved in oil and gas exploration. There are no significant exit barriers in the sector, other than long-term gas supply agreements contracted by the partnerships (see section 1.13.26) as well as the duty to dismantle production facilities prior to abandoning the exploration areas. Furthermore, the exit barriers for limited partnerships include TASE bylaws and the limited partnership agreements, which restrict the partnerships from conducting any operations other than oil and gas exploration. M. Substitutes for products of operating sector: Natural gas and oil are used as combustibles and are sold to industrial and private customers. The partnerships sell natural gas in Israel mainly to the Israel Electric Corporation and other industrial customers. Natural gas substitutes include diesel and fuel oil; oil substitutes include coal, hydro-electric energy, solar energy and biofuel. Each of the above substitutes has advantages and disadvantages and is subject to price fluctuations. The transition from use of one energy source to another usually requires considerable investment. The major advantages of natural gas over coal and liquid fuels are high yield and relatively low pollution. N. Structure of competition in the sector: See section 1.13.15. O. Investments in capital and security transactions: To the best of Delek Energy’s knowledge, in the past two years there have been no material investments in Delek Energy's capital and/or off-floor transactions by interested parties. With the exception of the following: 1. On November 23, 2009 Delek Investments sold, in an ex-TASE transaction, 107,750 ordinary shares in Delek Energy at an average price per share of NIS 872.40. As at the reporting date, Delek Investments holds 79.72% of the issued and paid-up share capital of Delek Energy and of its voting rights. 2. On August 31, 2009, Delek Energy published a shelf prospectus, as revised on November 5, 2009. On November 5, 2009 Delek Energy published a shelf offering memorandum and exchange tender offer (which was revised on November 17, 2009), to acquire participating units of Avner Partnerships. The offering was sent to all holder of participating units (other than Delek Energy, Delek Investments and Avner Oil and Gas Ltd.) Receipt and confirmation notices of acquisition by Delek Energy were given for 247,926,781 nominally registered participating units of NIS 0.01 each in return for which Delek Energy issued, on November 23, 2009, 393,535 ordinary NIS 1 par value shares of Delek Energy. 3. The The Company recorded a profit of NIS 200 million after completing the tender offer.

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P. Delek Energy operations 1. Below is a summary of the main investments (amounting to over $1 million each) planned in Delek Energy’s exploration and development projects between January 1, 2010 and December 31, 2011:1 Estimated Delek Energy’s total cost share of Main planned balance for estimated Estimated start Estimated Asset activities the period2 cost3 date completion date Tamar and Dalit Development of the USD 423 USD 66 million From Q1 2010 2012 leases natural gas field in the million1 Tamar lease, includes development drillings Tzuk Tamrur Tzuk Tamrur 4 drilling USD 3.5 million USD 1 million Q1 2010 Q1 2010 Enclave and production tests Ruth licenses; Processing of 3D USD 1 million USD 0.3 million From Q1 2010 Q3 2010 Alon licenses; seismic survey and preparation of drilling prospects Ratzio Licenses Processing and USD 3.3 million USD 0.7 million From Q1 2010 Q3 2010 interpretation of 3D seismic survey and preparation of drilling prospects Ashkelon lease: Setting up of USD 112 million USD 29 million From Q1 2010 Q4 2010 compression system and carrying out two additional drillings, Mari B 8 and Mari B 9 Elk Drafting of USD 40 million14 USD 40 million To be determined To be determined development plan

Forward-looking information: The above estimate of Delek Energy regarding the operations, including costs and schedules for the projects, is forward-looking information. This information is based on the estimates of Delek Energy and on various factors, including estimates received from the project operators, estimated data of availability of drilling equipment, costs and schedules and on unproven geological and professional assumptions. This estimation may not be realized, if there is a change in the estimations received, if the plans change due to the results of surveys and drillings and/or if there are changes in the plans made and/or whether or not a final agreement is signed with a drilling contractor and/or unexpected factors related to oil and gas drillings. The main factors are described in section 1.13.30 – Risk factors. 2. Below is a summary of the main expenditures for the period as of January 1, 2008 through December 31, 2009 in exploration and development of assets in which Delek Energy invested over $1 million annually:5

1 It is clarified that this is a general description of the operations, costs and timetables. For an in-depth description see the sections on Delek Energy's operations below. Also, the investments in the table are investments of Delek Energy, the partnerships and Delek Energy subsidiaries (including Aries), but do not include investments of Matra and Vogil. 2 Total cost for all the partners in the project 3 The amounts specified for the projects in Israel through the partnerships are reported in consolidated amounts according to the share of Delek Drilling only (and not the share of Avner) 4 Once the development plan has been drafted, the required amount for carrying out the plan may be significantly different from this amount 5 For information pertaining to Delek Energy's investments in the acquisition of rights see sections 1.13.4.A, 1.13.4.B, 1.13.5, 1.13.6 and 1.13.7.

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Actual total Delek Energy's Main operations cost for share in the cost Asset carried out1 2008-20092 for 2008-2009 Date Yam Tethys project Complete construction of USD 58 USD 15 million 2008-2009 (Noa lease, Ashkelon the reception terminal at million lease) and the Ashdod; purchase a reception terminal compression system Tamar Project Tamar 1, Tamar 2 and USD 303 USD 47 million 2008-2009 (development Dalit 1 drillings million program for the gas reservoir) Ruth, Alon and Ratziv Conducting 2D and 3D USD 27 USD 7 million 2008-2009 Yam Licenses seismic surveys million Vietnam project Seismic surveys; USD 250 USD 62.5 million 2007-2009 confirmation drilling and 3 million exploration drillings; carrying out of works; pre- development work at Chim Sao field, etc. Guinea-Bissau Espinafre 1 drilling; USD 4 million USD 1 million 2007-2009 Eirozes 1 drilling; analysis of existing seismic surveys; preliminary assessment of the size of the field at Sinapa and examination of optional development plan Elk 9 oil drillings; completion USD 55 USD 55 million Q2 2008 to of existing wells and new million Q4 2009 wells; workovers of drillings North Sea Oil drillings USD 22 USD 6.2 million Q1 2008 million

3. Below is a summary of the oil assets returned, transferred or expired in 2009-2008: Asset Expiry date of rights Reason for expiry 313/Ashkelon Amok 30.4.2008 Part of the Ohad license field with the Ashkelon license lease and for the rest of the field, proper drilling prospects were drafted. 344 License/Med Ashdod 13.7.2009 Licenses cancelled by Commissioner since drilling 2 in the license did not begin 349/Hof license 21.2.2010 Licenses cancelled by Commissioner since drilling in the license did not begin W12 Block Vietnam 20.7.2009 Sale of Delek Vietnam. Guinea-Bissau 18.12.2009 Sale of rights.

1.11.2 Yam Tethys project A. Most of the oil and natural gas operations of the limited partnerships are through the Yam Tethys project offshore oil assets. At the report date, the Yam Tethys project includes mainly the I/10 Ashkelon and I/7 Noa leases. The Yam Tethys project previously included additional permits and licenses which were used for exploration operations, however these operations did not yield any discoveries. B. Operations in the leases of the Yam Tethys project fields are conducted through a joint venture managed under a JOA signed on February 24,1999. The partners in the joint venture

1 In the North Sea project, drilling was carried out in Q1 2008. Delek Energy's share of the drilling expenses amounted to $6.2 million, which was charged to the statement of income for Q1 2008. 2 Total cost for all the partners in the project

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are Noble Energy Mediterranean Ltd. ("Noble") – 47.059%, Delek Drilling Partnership – 25.5%, Avner Partnership – 23% and Delek Investments – 4.441%. In addition, the Partnerships operate together with Noble under several other licenses (see section 1.13.3A). C. The Yam Tethys project partners hold rights in two proven gas reservoirs. The Noa gas reservoir was discovered in June 1999 and the Mari reservoir was discovered in February 2000. In view of the findings concerning these reservoirs, the partners in the Yam Tethys project started developing the reservoirs in 2001 by establishing a production infrastructure and a gas transmission pipeline to the shore. Construction of phase 1 of the production system was completed in 2003. Phase 1 included manufacture and installation of the production platform above the Mari-B reservoir (Mari-3B drilling), drilling of Mari-4B, 5 and 6 production drillings, completion of the Mari-2B underwater drilling and its connection to the platform, and laying of a 42 km pipeline from the production platform to the temporary reception terminal in Ashdod. Phase 1 also included production drilling at Mari-7B and establishment of a fixed reception terminal on Ashdod shore ("the Permanent Reception Terminal") which was completed in the first quarter of 2008. At the beginning of August 2008, the Yam Tethys Group and Israel Natural Gas Lines Company Ltd. ("INGL") signed an agreement for the operation of the permanent natural gas reception terminal so that the natural gas produced from the partnerships' reservoirs flowed to the reception terminal before being transmitted to the national natural gas pipeline. Full operation of the permanent reception terminal (which commenced in October 2008) enables the supply of the growing demand for natural gas. D. During Q1 2010 the partnerships confirmed their participation in two additional production drillings in the Mari gas field, Mare B 8 and Mari B 9, at total cost (for each partner) of USD 85 million which is expected to be carried out in 2010. These drillings are expected to cause several initiated short shut downs in the supply of gas, which is not expected to materially affect the actual supply of gas from Yam Tethys to the customers. Furthermore, it was decided, due to the decline in the pressure level at the Mari reservoir, to install compression systems on the production platform of the project. The drillings and the compression systems are intended to increase the production capacity from the Mari gas field and this is in order to meet the demand of the various customers of the Yam Tethys project, and could serve as part of the system for pumping natural gas to the Mari field (if it is decided to do so at all). Based on the information received by the partners from the operators of the project, the compression system is expected to be completed and running during the current year, after the Mari B8 and Mari B9 drillings, the preparations of which are underway and which are expected to take about 6 months. According to the estimate of the operators, the final budget of the compression system could amount to USD 80 million (for 100% of the rights), of which to date USD 56 million has been approved. Establishment costs of phase 1 of the production facility (for 100% of the rights) amounted to $400 million. For a description of the expenses included in this project for January 1, 2008 to December 31, 2009, see section 1.13.1.T(2) above.. Phase 2 of the production facility, which has yet to be started, is expected to include the sub- sea completion of the Noa field and its connection to the production platform. The total cost for the Yam Tethys project (for 100% of rights) could amount to $200 million, assuming there is no participation in costs by other entities. The Yam Tethys project partners are reviewing potential cooperation with British Gas (“BG”), inter alia, regarding joint development of the Noa field and the adjoining natural gas field, located off the Gaza coast, which BG operates, as well as for transmission of natural gas from these fields through the Yam Tethys production and transmission facility. This phase could also include the examination of potential connection to the Or field,1 to the production facility that will connect the Noa field to the production platform, if the owners of the Or field decide that development is financially feasible. E. Forward-looking information: The above estimate of Delek Energy regarding costs and schedules is forward-looking information, based on Delek Energy’s preliminary assessments of the cost components of the project, and based on assessments received from the operator. The actual schedules and costs may differ from the above estimate, and are contingent, inter alia, on completion of detailed planning of the project components, which have not yet been

1 The Or field is in the I/8 Med Yavne lease held by third parties, and lies between the I/7 Noa lease and the I/10 Ashkelon lease. It is noted that the Delek Drilling partnership has royalty rights in the Or field, under its agreement with Ratio, in which Ratio undertook to pay the Delek Drilling partnership royalties of 0.625% of its share in the output from the I/8 Med Yavne and I/9 Med Ashdod leases (in other words, 0.1375% of the total output from the lease).

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carried out, bids from contractors, changes to global suppliers and raw material markets, such as metals, and in joint development, if any, with BG as set forth above. F. Permits and licenses for production and transmission systems: As part of the development of gas discoveries by the Yam Tethys project partners, the partners have been granted permits and licenses under the Petroleum Law, 5712-1952 (“the Petroleum Law”) and the Natural Gas Sector Law, 5762-2002, which are mandatory for construction and operation of the production system and the transmission system from the production platform to shore. G. Joint operating agreement: Exploration and production activities in Yam Tethys project leases are carried out under a joint operating agreement (JOA) signed on February 24, 1999. The parties to the JOA are the limited partnerships and other partners in the Yam Tethys project as set forth below. Under the JOA, Noble was appointed operator of the Yam Tethys project. Noble is an indirect subsidiary of Noble Energy Inc., a US oil and natural gas exploration and production company. Nobel Energy Inc. is a public company traded on the NYSE under the symbol NBL. H. The joint operating agreement includes the following provisions: 1. Noble will be the operator under the JOA and will bear sole responsibility for management of the joint operations In managing the joint operations, Noble is subject to obligations concerning, inter alia, compliance with instructions of the operating committee, agreements, licenses and legislation. 2. The operator will determine the number and identity of the workers, their work hours and the salary that will be paid to them regarding the joint operation. 3. Provisions were specified for indemnification and limit of liability for the operator, its officers and affiliates with respect to discharging its duties as operator according to which the operator is eligible for indemnification for any damage, expense or liability pertaining to its duties as an operator (excluding exceptional cases of gross negligence of its senior employees, in which case the indemnification shall apply to damages, expenses or liability for over one million dollars), as set forth in the joint operating agreement. 4. The operator is entitled to reimbursement of all direct expenses resulting from the fulfillment of its duties as an operator and reimbursement of its indirect expenses deriving from the share of the joint venture expenses, ranging from 1% of venture expenses when the annual venture expenses exceed $12 million, to 4% of venture expenses when these are below $4 million annually. For expenses associated with development and production operations of the Yam Tethys project, the parties agreed that for development and production expenses commencing January 1, 2004 the operator will be paid 1% of indirect expenses up to a limit of $20 million in expenses, and 0.85% of expenses exceeding that threshold. 5. The partners to the joint operating agreement have committed to protect and indemnify the operator, on a pro-rata basis in line with their share of participation in Yam Tethys licenses. The operator’s liability is limited to certain cases, such as gross negligence. 6. According to the joint operating agreement, Avner Oil and Gas Ltd. was appointed as the Israeli operator to carry out duties, functions, roles and services in Israel for the benefit of the joint operations, subject to coordination with Noble. The proceeds from these services are not material. 7. Operating committee: Under the agreement, the parties established an operating committee with the authority to approve and supervise the required joint operations to comply with terms of licenses to which the JOA applies. The operating committee is composed of representatives of the parties, with each representative having voting rights commensurate with rights of the party being represented. Unless otherwise determined in the JOA, all decisions, approvals and other acts by the operating committee on any proposal brought before it shall pass by affirmative vote of two or more parties (which are not associated / affiliated parties) which jointly hold at the time of the vote at least 51% of total participation rights in the area of the license to which the decision applies.

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I. Proved1 and probable2gas reserves in the Yam Tethys project As aforesaid, the Yam Tethys project partners have rights in two natural gas reserves – Noa and the Mari reservoirs. At the reporting date, actual production is from the Mari gas reservoir only.3 The following table represents proved and probable gas reserves in the Mari and Noa reserve as at December 31, 2009 and total gas sales from the Mari reservoir in 2008-2009.

BCM4 Proved + Proved probable Gas reserves in Mari reserve at December 31, 2007 19.85 20.46 Gas sold in 2008 (3.5) Gas sold in 2009 (2.9) Balance of gas reserves at December 31, 2009 at Mari reserve 13.4 14 Balance of gas reserves at December 31, 2009 at Noa reserve 6.2 7.6 Balance of gas reserves at December 31, 2009 at Mari and Noa 19.6 21.6 reserves

Notice regarding forward looking information: The foregoing assessment pertaining to the recoverable gas reserves is forward looking information. The above assessments are taken from assessments based, inter alia, on geological, geophysical and other information received from the drillings and are professional assessments and opinions drafted by the leading companies conducting reserve assessments of oil and gas reservoirs and they are as yet uncertain. Delek Energy did not conduct any independent assessments and tests of the information received as aforesaid, however in light of the reputation of the said companies, Delek Energy has no reason to doubt the accuracy of the assessments. The said assessments may be updated as additional information is added, and/or as a result of a range of factors connected to the oil and gas exploration and production projects, including as a result of continuous production from the reservoir . J. Planned activities for the Yam Tethys project 1. On October 20, 2009, Delek Energy, together with Teekay LNG Partners LP7, submitted the early selection documents for the BOT tender for planning, financing, establishment, operation and maintenance of a facility for receiving offshore liquid natural gas. Based on the early selection stage documents published by the State, the tender committee intends to select an entity that will carry out the project, in two competitive stages: The early selection stage and the request for proposal (RFP) stage, where only the groups that have passed the early selection stage will be required to participate. The early selection documents determined, inter alia, the following: (1) the facility will have the minimum daily output capacity of 16 million m3 of natural gas (annual capacity of BCM 4 natural gas); (2) the tender will be for a period of 20-30 years, so that at the end of that period the

1 US SEC regulations for reservoir engineering companies stipulate in principle that proved gas reserves are quantities of gas that, according to geological, engineering and economic data, can be produced at assured high production levels (at least 90% probability) from the relevant reservoir. 2 Commencing from the current report, information on probable reserves is also included. 3 The decision to produce from the Mari reserve first was taken on the grounds of economic and engineering efficiency. 4 The information in this section refers to 100% of the reservoir (including the share of the other participants and royalties). 5 This quantity was updated in the reserve reports for 2008-2009, whereby in 2008 the increase was BCM 0.2 and in 2009 the increase was BCM 1.89, due to updating the assumptions concerning the production capacity at the reservoir in view of the actual production figures achieved. 6 In the reserve report for 2009 an increase was made of BCM 1.89 for the Proved gas reserves and BCM 1.16 for the Proved + Probable gas reserves at the Mari reservoir, due to updating the assumptions concerning the production capacity at the reservoir in view of the actual production figures achieved The reserve figures at December 31, 2007 were updated retroactively due to the foregoing and are different to the reserve estimates that appeared in NSAI reports published in the past with respect to December 31, 2007 and December 31, 2008. 7 A limited partnership dealing in marine transportation of natural liquid gas, whose securities are listed on the NYSE under the sign TGB ("Teekay").

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facility will revert to the ownership of the State, gratis; (3) the deadline for the establishment is meant to be October 2013. It is clarified that, at the early selection stage is the initial stage only, which does not require submitting a proposal at the tender stage, and that the technologies for carrying out the project, the site of the project and other details required for deciding whether to submit a proposal at the RFP stage, have not yet been defined. At reporting date, Delek Energy is unable to assess the scope of the investment required for the project, and it is uncertain whether it can comply with the requirements for carrying out the project. The Yam Tethys group is conducting a techno-economic analysis of possible conversion and operation of the production facilities and pipeline in the Yam Tethys project and at the Mari reservoir for storing natural gas. Following the Tamar and Dalit discoveries, the Yam Tethys group is currently examining the possible synergy between the Yam Tethys project and the Tamar project including, with respect to using the Yam Tethys project as a bridge for the supply of gas to Tamar project consumers until the project is completed and with respect to the possible use of the Yam Tethys and the Mari reservoir production facilities and pipeline for providing and operating strategic natural gas storage services (including supplying gas at peak demand times) for the needs of the Israeli market Furthermore, it is noted that a technical option is being examined to use the facilities for unloading and storage as Mari reservoir gas for the State of Israel. 2. As aforesaid, it was decided to establish two additional production drillings in 2010, Mari B8 and Mari B9 and to install a compression facility on the project production platform, which is expected to be running in 2010, and this is in order to address the demand of the various customers. These drillings and compression facilities serve part of the pumping and storage system of natural gas at the Mari reservoir (if it is decided to establish it). Forward looking information: Delek Energy's forgoing estimate concerning the time schedules and anticipated uses of the project is forward looking information. This information is based on assessments of the establishment of estimates received from the operator, regarding which there is yet no certainty. The above estimates will be updated when further information becomes available and/or as result of a range of factors related to the gas production projects. 3. On December 13, 2009, a memorandum of understanding was signed between the partners in the Yam Tethys project and the Israel Electric Corp (IEC), according to which the IEC will negotiate with the Yam Tethys project partners to purchase strategic stocks of natural gas ("Strategic Stocks") and to purchase pumping, storage and extraction services of the strategic stocks from the Mari reservoir. In addition, a memorandum of understanding was signed between the Yam Tethys project partners and the Tamar project partners according to which the foregoing strategic stocks will be supplied by the Tamar project, subject to the agreement of the partners in both projects. Forward looking information: The forgoing estimates concerning the agreements with the Israel Electric Corp is forward looking information, regarding which there is no certainty that it will materialize, in full or in part, in the aforesaid manner, and in particular, it is not at all certain that a binding contract will be signed. 1.11.3 Tamar Project A. General The limited partnerships own participation rights of 15.625% each in the I/12 Tamar lease (the Tamar natural gas field is located in its territory) and the I/13 Dalit lease (the Dalit natural gas field is located in its territory) (together - "the Tamar Project"). The leases were issued on December 2, 2009 following the Tamar and Dalit natural gas discoveries which were made in 2009 under the 308/Michal and 309/Matan licenses. Operations in the Tamar project are carried out pursuant to a joint operating agreement dated November 16, 1999, as it is revised from time to time. The Tamar project partners are: Noble – 36%; Delek Drilling – 15.625%; Avner – 15.625%; Isramco Negev 2 Ltd Partnership – 28.75%; Dor Gas Ltd. Partnership –

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4%1 Noble was appointed as the operator of the licenses. The Tamar project is located 50- 100 kilometers west off the coast of Haifa at a depth of 1,200-1,800 m and covers an area of 500 km2. B. The terms set in the Tamar and Dalit leases are almost identical and include, inter alia, provisions on the following key topics: the lease holder and operator, lease area, lease scope, validity of the lease (until December 1, 2038) which is divided into development stage and commercial production stage, sales to consumers in Israel, establishment of facilities, time schedules, contracts with supervision company, commercial production, storage of natural gas, cancellation, restrictions or lease changes, and termination of the leases and guarantees. C. Prior operations in the lease area 1. After Noble joined as operator of the licenses, it conducted further geological and geophysical work in the license area, based on results of seismic survey conducted by BG in the past. Consequently, in November 2006, Noble recommended a work plan to the other project partners, which includes the Tamar 1 drilling. On November 18, 2008, the Tamar 1 drilling commenced at an offshore depth of 1,680 meters, approximately 90 km west of Haifa. The drilling was completed at the end of February (including production tests, plugging the well and abandonment of site). Noble announced that logs at the drilling identified three high-quality reservoirs which include sand layers with a net total of 140 m of natural gas. The thickness and the quality of the reservoirs at the drilling sites were greater than the operator previously anticipated. After production tests at the drilling site, Noble informed the drilling partners that production tests, which were performed over a limited 18-m section of the lowest reservoir, yielded a flow rate of 30 MMcf/d of natural gasThe flow rate was limited by the testing equipment available on the rig and it was not possible to increase the production rate beyond this rate. Based on the test results, Noble estimates that after completion of the production drilling, natural gas can be produced at a rate of more than 150 MMcf/d. Furthermore, Noble also announced that after analysis of the data received in the drilling and production tests, it estimates that the gross mean resource 2 potential of the natural gas reserves at the Tamar formation is 5 Tcf (approximately 142 BCM) and that the discovery is within the scope of a commercial discovery3. Forward-looking information: The aforesaid estimates concerning the results of the Tamar 1 and Dalia 1 drillings and the plans for continuing, as provided by Noble, including the Noble's estimates pertaining to the future production rate of natural gas from the Dalit 1 drilling after completion for production and the financial potential of the natural gas reserves at the Dalit structure are all based on geological, geophysical and other data received from the drilling and from Noble and these are non-binding estimates and assumptions only, for which there is still no certainty and they are forward-looking information. The foregoing assessments may be updated as additional information is added, and/or as a result of a range of factors connected to the oil and gas exploration and production projects, including as a result of analysis of the findings at the drilling and production analyses . Upon completion of the Dalit 1 production tests, the Atwood Hunter drilling rig returned to the to the Tamar commercial gas discovery formation to drill the Tamar 2 assessment drilling.

1 In an agreement dated January 21, 2007 between the partnerships of the one party and Dor Chemicals Ltd of the second party, Dor Chemicals rights were sold to the partnership and in return for them Dor Chemicals Ltd. is entitled to overriding royalties of 6% of the volume of gas/oil and/or other valuable materials (hereunder in this section: oil) produced from the sold rights, less the volume of oil used for actual production, before deduction of all expenses and/or royalties, with the exception of deduction of the royalties paid to the state pursuant to the Oil Law, commencing from the date of first commercial production of oil from the sold rights. The royalties will be paid by the limited partnerships, based on their market value, according to the well, and will be calculated in the same way as the calculation for royalties paid to the state pursuant to the Oil Law. 2 The statistical / probable average of gas reserves in a specific reservoir, calculated by the statistic average of the estimated recoverable gas reserves a given probability range of 1% to 99%. It is noted that this is not an estimate of proved reserves, which may be higher or lower than the above estimate. 3 This estimate increased during the course of 2009 with the drilling of Tamar 2 and after receiving the reserve report from a leading independent engineering consultation company dealing in oil and natural gas reserves assessment (NSAI), see below

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On April 27, 2009 work began at the Tamar 2 drilling, which is situated approximately 5.5 kilometers north-east of the Tamar 1 drilling, where drilling was carried out on the slope of the Tama structure. The objective was, inter alia, to confirm the data with regard to the quality of the reserve and its continuation in the formation. The oil drill was drilled at a water depth of 1,685 m to a final depth of 5,145 m.. On July 7, 2009. upon completion of the production analyses, Noble announced its updated assessment with regard to the gas reserves in the Tamar formation, as follows: A) The findings of the Tamar 2 drilling, from the aspect of the depth and quality of the reserves, match the findings at the Tamar 1 drilling. The findings regarding the drilling pressure confirms the continuation and excellent quality of the reserves in the strata of the formation. B) The results of the Tamar 2 drilling considerably reduced the uncertainty of the previous assessments regarding the natural gas reserves in the Tamar formation. In view of the foregoing, Noble estimates that the gross mean resources of the natural gas in the Tamar formation are approximately TCF 6.3 (BCM 178). Forward looking information: The forgoing information, including the estimates pertaining to the production rate of natural gas from the drillings after completion of the production drilling and the gross resources of the natural gas reserves in the Tamar and Dalit formations, and including the assessments concerning the gross mean resources of the natural gas reserves in the Tamar field as set forth below, is forward looking information. The above assessments are taken from assessments based, inter alia, on geological, geophysical and other information taken from the drillings and from the operator of the leases, and which are professional assessments and opinions about which there is no certainty. The partnerships have not conducted independent appraisals or tests of the assessments received as aforesaid. The said assessments may be updated as additional information is added, and/or as a result of a range of factors connected to the oil and gas exploration and production projects, including as a result of further analysis of the findings of the drillings. The cost of the drillings (for 100% of the rights) as specified above, amounted to USD 273 million, according to the following breakdown1: (1) Tamar 1 drilling (including production tests) – USD 92 million; (2) Dalit 1 drilling (including production tests) – USD 57 million; (3) Tamar 2 drilling (including production tests) – USD 78 million; (4) Mobilization and demobilization of the drilling rig to and from the drilling sites (for all three drillings) – USD 46 million2; The share of each partner (15.625%) of the costs set out above, amounted to USD 43 million (each). 2. The natural gas reserves in the Tamar field3 Based on a report received from NSAI, the natural gas reserves in the Tamar filed, which will be classified as 2P (Proved + Probable) upon approval of the Tamar field development plan (which will also include reasonable projections of the sale of the natural gas that will be produced from the field), was updated by TCF 7.7 (approximately BCM 218). The foregoing gas reserves include natural gas reserves which were classified as 1P (Proved) for a volume of TCF 6 (approximately BCM 170). Forward looking information: The NSAI assessments regarding the natural gas reserves in the Tamar field is forward looking information. The above assessments are based, inter alia, on geological, geophysical and other information taken from the drillings and from the operator of the leases, and which are the professional assessments and opinions of NSAI and about which there is no certainty. Delek Energy did not conduct any independent assessments and surveys of the information received as aforesaid, however in light of the reputation of NSAI, which is the leading appraisal company in assessment of oil and natural gas reserves, Delek Energy has no reason to doubt the accuracy of the

1 This amount does not include ongoing amounts incurred in connection with the Michal and Matan licenses. 2 The cost includes the Tamar 1, Tamar 2 and Dalit 1 drillings 3 The figures in this section only refer to the Tamar gas field, in the Tamar lease.

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conclusions of their report. The said assessments may be updated as additional information is added, and/or as a result of a range of factors connected to the oil and gas exploration and production projects, including as a result of further analysis of the findings of the drillings. 3. Work plan The partners in the Tamar project are currently taking the following actions: A) Negotiations for the sale of natural gas to potential consumers in Israel1. Following the Tamar and Dalit natural gas discoveries, the lease partners decided to develop, in the first stage, the Tamar reservoir. As part of these efforts, the lease operator began in 2009 to examine the various alternative plans for developing the reservoir in order to formulate recommendations for a priority development plan, while hoping to enable commencement the natural gas supply from the Tamar reservoir from the beginning of 2012. The lease operator presented the lease partners a first stage development plan for the project, which includes, inter alia, 3-4 additional drillings (in addition to the Tamar 1 and Tamar 2 drillings), concluding these 5-6 drillings for production purposes and to connect them, via a pipeline, to the onshore reception facility. This initial stage will enable a production rate of natural gas of TCF 850 million per day. In the second stage, after it is decided to continue, several additional drillings will be carried out and the production rate will increase to TCF 1,200 per day. As part of advancing the development plan, the lease operator is taking steps to promote approval of the national outline plan (under National Outline Plan 37), which will include the establishment of the onshore natural gas reception facility, which according to one of the alternatives may be established in the area of Faradis. According to the information the lease operator gave to the lease partners, the development costs of the Tamar reservoir are based on the foregoing development plan and at this stage the lease operator estimates them to be USD 2.8 billion (for 100% of the rights). This amount includes, inter alia, unexpected expenses for the planning stage, which has not yet been completed, and for the establishment stage. It is noted that the development budget is yet to be brought to the lease partners for approval. Notice regarding forward looking information: The foregoing estimate pertaining to the development costs is forward looking information, as defined in the Securities Law. These estimates were primarily received from Noble and are based on the existing development plan which is still in the planning stages, which is subject to various approvals and modifications according to the planning progress. At this stage, these are only assessments for which there is still no certainty. The foregoing assessments are expected to be updated as additional information is gathered, including as a result of more advanced planning and/or as a result of the progress made in the installation of the system and future changes as well as from a range of factors connected to the natural gas production projects. B) Concurrently with the above, the partnerships intend advancing the examination of the various alternatives for financing their shares of the development costs for the Tamar and Dalit discoveries, including interim and project linked financing. 1.11.4 Exploration operations of the limited partners other than the Yam Tethys project A. In addition to the production operations of the Yam Tethys project and the Tamar project development efforts, the partnerships are engaged in further oil and gas exploration pursuant to licenses and leases granted under the Oil Law. B. Below is a summary of the oil and gas exploration operations of the limited partnerships in other areas:

1 In this matter see section 1.1.26F below, which refers to the letters of intent signed between the Tamar project partners and various Israeli consumers for the sale of natural gas from the Tamar project gas fields.

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C. 321/Zerach license – Tzuk Tamrur enclave1 1. Tzuk Tamrur enclave covers 16.5 million sq.m. within the Zerach license, in the Dead Sea area. Each partnership holds 25% of the rights to Tzuk Tamrur enclave. In the Tzuk Tamrur 4 drilling, as set forth below, each partnership holds 22.386%. The other partners in the drilling are Lapidot Oil Exploration Israel Ltd., which holds 10.456% of the rights and Zerach, which holds 44.772%. 2. Under terms of the license and amendments following its issue, the license is valid through to December 31, 2010. The terms and conditions of the license states that the Tzuk Tamrur 4 drilling and oil production from the Amuna2 and Tzuk Tamrur 3 drillings should start by September 15, 2009. 3. In July 2009, a drilling contract was signed with a drilling contractor (Lapidot Oil Exploration Israel Ltd.) for the Tzuk Tamrur 4 drilling in the formation adjacent to Tzuk Tamrur 3, approximately 3 kilometers to the north. The Tzuk Tamrur 4 drilling began on November 29, 2009 and on January 26, 2010 the drilling reached a final depth of 2,103 m. Electric tests (logs) were conducted by January 31, 2010. Following initial processing and analysis of the logs, the partners decided to conduct production tests at two levels (in the Ra'af formation and Gvanim formation – which is divided into three sections). The last production test carried out on the upper part of the Gvanim formation in a 3m thick stratum, gas containing oil was found. The suction produced fluids which stabilized at a rate of 50 barrels per day, contained 75% oil and 25% water. A small quantity of oil with water was found in the other strata tested. The drilling was temporarily suspended to complete regular production and to examine the options for carrying out an additional production test at the lower part of the Gvanim formation. The total cost of the drilling (including tests) is currently estimated to be USD 6.5 million, and the share of the partnerships is estimated at USD 1.6 million (each). The partners intend conducting a supplementary gravimetric survey and/or seismic survey in the area. These surveys could enable remapping of the size of the reservoir which was discovered in the drilling, assess the volume of the oil reserves in the reservoir and plan a development program for the reservoir, all in order to draft an assessment regarding the commercial and/or financial viability of the reservoir. These surveys may also locate additional formations worth drilling. In addition, the partners decided to establish an oil reception and supply system from the Tzuk Tamrur 3 (which, to the best of Delek Energy's knowledge, based on the production tests conducted in 2006, may produce 120 barrels of liquid per day, containing 96% oil and 4% water), Tzuk Tamrur 4 (which is in the Tzuk Tamrur enclave) and Halamish 1 (which is in the 327/Tzurim license area) drillings. The partnerships also examined the options of collaborating with Zerach Oil And Gas Exploration Limited Partnerships in the operations connected with the Amuna 1 drilling in the Zerach/321 license area. Delek Energy estimates the budget for the establishment of such a system could amount to between USD 600,000 and USD 1,100,000, depending on the capacity of the system. Notice regarding forward looking information: The foregoing estimate pertaining to the results of the drilling and the continuing work plan is forward looking information, as defined in the Securities Law. The foregoing estimates are based on geological, geophysical and other data received from the drilling and production tests. At this stage, these are only assessments for which there is still no certainty. The said assessments are liable to be updated as additional information is added, including as a result of further processing and analysis of the findings of the drillings, and/or from the additional operations that will be carried out as aforesaid and/or as a result of a range of factors connected to natural gas exploration and production projects.

1 On November 21, 2006, the Zerach Oil and Gas Exploration Ltd. Partnership published a prospectus to raise capital for financing its share in the exploration in the license area. This report included Zerach's assessments and data with respect to the planned operations in the license areas. 2 The Amuna drilling is located in the license area, but outside of the Tzuk Tamrur enclave.

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D. 327/Tzurim license – Halamish Enclave 1. Halamish enclave covers 35.5 million sq.m. within the Tzurim license area, in the Dead Sea area. The share of each of the partnerships in rights to Halamish enclave is 25%, with Ginko Oil Exploration Limited Partnership holding the remaining 50% of the rights. 2. In the past, the Halamish-1 drilling was conducted in the Halamish enclave. The drilling was abandoned in 1999. 3. Under the terms of the license and amendments following issue, the license is valid until December 1, 2010 on condition that a binding contract for carrying out drilling is signed by such date. At the reporting date, discussions are underway with the Israel Nature and Parks Authority with respect to the aforesaid drilling. A contract for carrying out the drilling is yet to be signed since the partnerships are examining possible changes. Upon completing to draft the updated plans, an appropriate application will be submitted to the Petroleum Commissioner. E. 331/Ohad License 1. On June 15, 2006, the 331/Ohad and 332/Shimshon licenses were granted to Delek Drilling Management (1993) Ltd. (25%), Avner Oil and Gas Ltd. (25%) and Isramco Inc. (50%). On January 18, 2007, the parties applied to the Antitrust Commissioner for approval of joint holdings of the license rights.1 On August 2, 2007, the Commissioner’s approval was still pending, and consequently it was decided to separate the holdings so that the full holding in the Shimshon license would be transferred to Isramco and the full holding in the Ohad license would be transferred to the partnership and Avner (50% each). The general partners transferred their rights to the partnership. The Ohad license was extended until June 30, 2010. 2. The work plan for the license area is based on the license terms and includes processing of the seismic survey conducted in the license area and drafting of a prospect of drilling. Avner Oil and Gas Ltd. serve as the license operator. F. 337/Avia and 338/Keren licenses 1. The license fields are 60 km off the Tel Aviv and Ashdod coastline. The licenses were granted for three years and cover an area of 400 km2 each. The partnerships have equal shares in the licenses (50% each). 2. Main license terms: (a) Reprocessing of existing seismic material and its integration into the information by September 30, 2008; (b) presentation of at least one final drilling prospect by December 31, 2008;2 (c) signing a contract with the drilling contractor by June 30, 2009; (d) submission of a progress report for implementation of the drilling plan every two months after commencement the contractor's work. (e) commencement of drilling by June 1, 2010 or according to a contract, approved by the Petroleum Commissioner, with the drilling contractor. 3. Following talk that began in May 2009 with the commissioner concerning the issue of oil, the operator submitted on September 2, 2009, an application to change the work plan in the licenses to include: (1) interpretation of the oligo-miocene cross-section below the salt includes an amplitude test, formations and cannels, finding leads and defining prospects by December 15, 2009; (2) drafting prospects for drilling within two to four months (depending on whether it will be necessary to re-process the data); (3) drilling contract by June 9, 2010. 4. In December 2009, after completing the foregoing interpretation, a summary report was submitted to the commissioner. The license partners are currently acting to analyze the findings and draft the drilling prospects. G. Ruth licenses 1. The areas of the 358/Ruth A, 359/Ruth B, 360/Ruth C, 361/Ruth D, 362/Ruth E, and 363/Ruth F licenses ("Ruth Licenses") are located offshore at depths beginning at 700 up to 1,500 m and cover areas of 2,400 sq/km., 20-90 km west of Haifa. Ruth licenses were

1 In the matter of the decision of the Antitrust Commissioner, following which the partners applied to the Commissioner, see section 1.13.25C. 2 Preparation of the prospect has not yet been completed.

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granted in lieu of 197/Ruth preliminary permit and were received on March 1, 2009 for three years. The partners’ rights in the Ruth licenses are as follows: Noble - 47.059%, Avner - 25.106%, and Delek Drilling - 27.835%. 2. Main license terms: (a) Mapping potential prospects based on the new seismic survey, seismic facies analysis, rock physics and assessment of potential by December 1, 2009; (b) financial analysis of prospects by March 1, 2010; (c) further 2D and 3D seismic survey, if required by March 1, 2011; (d) signing of an offshore drilling contract with drilling contractor by March 1, 2011 (e) commencement of tertiary goal drilling within 36 months of receiving the permit, in other words, by February 29, 2012. 3. The work plan is based on the abovementioned license terms. For further information pertaining to the approved work plan for the Ruth, Alon and Ratzio license areas, see section G below. Furthermore, it is noted that in 2011, 3D seismic surveys may be conducted in the license areas. H. Alon licenses 1. The areas of the 364/Alon A, 365/Alon B, 366/Alon C, 367/Alon D, 368/Alon E, and 369/Alon F licenses ("Alon Licenses") are located offshore at depths beginning at 1,400 up to 1,800 m and cover areas of 2,400 sq/km., 50-140 km north-west of Nahariya. The Alon licenses were granted in lieu of 198/Alon preliminary permit and were received on March 1, 2009 for three years. The partners’ rights in the Alon licenses are as follows: Noble – 47.059%, and Avner and Delek Drilling – 26.4705% each, after Noble exercised its full option rights in the Alon preliminary permit in accordance with the agreement between Noble and the partnerships. 2. The Alon preliminary permit terms are similar to those in the Ruth preliminary permit and the work plan deriving from them. I. Ratio Yam licenses 1. The areas of the 349/Rachel, 350/Amit, 351/Hannah, 352/David, and 353/Eran licenses ("the Ratio Yam Licenses") are located offshore at depths beginning at 1,200 up to 1,700 m and cover an area of 1,800 sq.km., approximately 130 km west of the Haifa coastline. The partners’ rights in the Ratio Yam licenses are as follows: Ratio – 15%, Delek Drilling – 22.67%, Avner – 22.67%, and Noble - 39.66%. The Ratio Yam licenses were granted in lieu of 193/Ratio Yam preliminary permit and were received on December 15, 2008 for three years. 2. Main license terms: (a) Mapping potential prospects based on the new seismic survey, seismic facies analysis, rock physics and assessment of potential by September 15, 2009; (b) preliminary financial analysis of prospects by December 15, 2009; (c) further 2D and 3D seismic survey, if required, by December 15, 2010; (d) signing of an offshore drilling contract with drilling contractor by December 15, 2010 (e) commencement of tertiary goal drilling by December 14, 2011. J. Rights in Cyprus 1. On January 22, 2009 a contract was signed between the general partners in the partnerships and a company affiliated with Noble ("Noble Cyprus") according to which Noble Cyprus undertook to transfer to the general partners 15% of the amount of the concession (Production Sharing Contract) with the government of Cyprus ("the Concession Contract"), subject to approval of the authorities in Cyprus as specified below ("the transfer Agreement"). The product sharing contract grants oil and/or gas exploration and production rights in the Cypriot commercial waters known as Block 12, located approximately 15-20 km west of the Alon licenses ("Block 12"). On January 1, 2009 each of the partnerships signed an option agreement (which was amended on December 29, 2009) with the general partner ("Option Agreement") to receive all the rights that will be transferred to the general partner under the aforesaid transfer agreement, once these have been granted (subject to the general partners receiving them and subject to the exercise terms as set forth below). 2. In return for this option, the partnerships undertook to pay the general partners the entire amount paid by them with respect to the PSC rights and/or to indemnify the general partners for any liability imposed upon them under the PSC and/or the agreements that will be signed with Noble's subsidiary ("Noble Cyprus") pertaining to the PSC for Block 12 (the transfer agreement and the JOA as stipulated below), from the date the PSC is

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signed until the date the option expires or is exercised, including the partnerships' relative share in the costs deriving from the PSC pertaining to the works that are required in the initial stage (up to three years from the date the PSC is signed) and including amounts and liabilities incurred during the option period and/or to which the general partners are obligated during the option period, with a payment date that is later than the expiry date of the option. It is clarified that the consideration for the option is not limited to the amounts noted in this section and in section 7 below, and it is possible that additional undertakings and expenses will be imposed on the general partners, and which are unexpected and unknown as at the date of this report, however said undertakings will only be applicable following receipt of the approval of the authorities in Cyprus for the rights transfer as aforesaid. 3. The option agreement also stipulates that the option may be exercised, without additional consideration, until September 30, 2010 It is noted that the Partnerships will not exercise the option unless the TASE bylaws are amended so that the oil exploration Partnerships are permitted to participate in the explorations in Block 12. If the TASE bylaws are not amended (as described below) by September 30, 2010, the Partnerships will not be able to exercise the option, however they will continue to bear their obligations under the option agreement, if applicable. In such event, the Partnerships will consider selling their option to the highest bidder. It is also noted that it is not at all certain that the Partnerships will be able to find a buyer for the Block 12 rights and/or will be able to sell the rights in Block 12 for a price that will reflect their expenses in accordance with the option agreement. Therefore, the Partnerships may be required to bear the expenses of the works in Block 12 without benefiting from the PSC rights and their rights in Block 12. It is noted that under Article 8 of the Income Tax (Deductions from revenues of oil rights holders) Regulations, 5716-1956, the Petroleum Commission confirmed the applicability of the regulations to the Partnerships in Block 12 as well, subject to the conditions set by him. 4. In the transfer agreement of January 22, 2009, between the general partners and Noble Cyprus, Noble Cyprus undertook to transfer to the general partners 15% (each) of the participation rights in Block 12, subject to the approval of the Cypriot authorities, which has not yet been received. The transfer agreement was signed subsequent to the joint agreement of the general partners and Noble. Under the agreement, Noble will act to receive the rights in Block 12 from Cyprus and if these rights are received, the general partners will receive between 30% and 40% of the rights and the liabilities under the PSC, subject to receipt of the required approvals. After Noble Cyprus signed the PSC, the general partners informed Noble Cyprus that they wanted 15% (each) of the rights and liabilities under the PSC, and to transfer them in full to the Partnerships. It is clarified that as at the reporting date, the required approval for the transfer of rights to the general partners, from the authorities in Cyprus is yet to be received. Under the transfer agreement (as amended), if the approval of the Cypriot authorities is not received by December 29, 2012 or by an earlier date that will be set according to the terms of the transfer agreement, but no earlier than March 31, 2011, the general partners may cancel the agreement in return for reimbursement of all expenses or to transfer their rights to a third party who will be approved by the authorities in Cyprus and Noble Cyprus, all subject to the terms of the transfer agreement. 5. According to the TASE bylaws, the Partnerships are not entitled to carry out projects that are not defined specifically in the limited partnership agreement. "Project" in the TASE bylaws means oil and gas exploration or production under an oil right or preliminary permit with priority rights to receive a license as defined in the Petroleum Law, and as granted to the Partnership. As Block 12 does not lie within the territorial waters of Israel, Israeli jurisdiction does not apply and is not granted under the Petroleum Law, therefore, according to the current version of the TASE bylaws, the Partnerships may not participate in exploration in this area. The general partners asked the TASE to amend the bylaws, to enable the Partnerships to participate in exploration beyond Israel’s territorial waters. The TASE has yet to approve this request. Therefore, the general partners signed the transfer agreement and at the same time, the general partners and Noble Cyprus signed a JOA applicable to Block 12 to regulate the operation if the abovementioned transfer is approved, and Noble Cyprus was appointed as the operator. 6. On October 24, 2008, Noble Cyprus and the Republic of Cyprus signed the PSC. The PSC defines the terms for oil exploration and production in Block 12, including the

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agreement period, project area, project work plan, guarantees to be provided to ensure that the work will be carried out, tax provisions, bonuses payable according to project development stage, and the right of Cyprus to a share of any oil and/or gas that may be produced, according to the arrangements defined in the PSC. The term of the agreement was based on the progress of the work stages. 7. The Block 12 work plan through to the end of the initial period ending October 2011 includes, inter alia, drafting of a report on the existing seismic data. A seismic survey including processing, interpretation and mapping of the data was conducted in Block 12. As of the date of this report, a 3D seismic survey has been conducted. The projected budget for the initial work period required under the concession agreement (3 years) amount to EUR 7 million (approximately USD 0.55 million) (for 100% of the concessions). The partnership's share in the foregoing costs are EUR 1,050,000 (approximately USD 1.45 million) (each). The said costs will be paid periodically based on the progress of the Block 12 work plan. The partnership's share in the foregoing costs are EUR 300,000 (approximately USD 410,000) (each). 1.11.5 Participation rights in oil assets in the USA A. AriesOne 1. In August 2006, Delek Energy USA signed an agreement with a US financial institution, pursuant to which Delek Energy USA acquired the financial institution’s share in the AriesOne Limited Partnership, a company registered in the USA engaging in oil and gas exploration and production (“AriesOne”). Delek USA acquired 83.49% of rights in AriesOne, with the remaining rights (16.51%) held by the general partner, Aries Resources LLC, a US company based in Houston, Texas engaging in management and development of oil assets. AriesOne owns oil assets located mainly in Southern USA (Texas, Louisiana, Colorado, Kansas, Oklahoma and New Mexico), including exploration and production areas containing 200 oil- and natural gas-producing wells. In return for the foregoing rights, Delek Energy USA paid the seller $7.3 million for the rights and also assumed obligations by AriesOne amounting to $0.3 million. Delek Energy USA total investment since its acquisition through to the end of 2009 amounted to USD| 9 million. On January 27, 2010 Delek Energy USA signed an agreement with AriesOne (in this section - ("the Transfer Agreement"), according to which AriesOne transferred to Delek Energy USA oil assets held by it, constituting 83.5% of the value of its assets, in lieu of Delek Energy USA's rights in Aries One. The effective date regarding the transfer agreement was set as January 1, 2010 and the transaction was completed on February 26, 2010. Subsequent to the completion of the transaction, the operating agreement was cancelled and the assets which were transferred are currently /operated by Delek Energy USA. It is noted that prior to its acquisition by Delek Energy, AriesOne conducted hedging transactions for the prices of oil and gas, which were meant to end at the end in 2010. The fair value of the liabilities in these transactions at December 31, 2008 amounted to NIS 24.8 million, and NIS 20.5 million as at December 31, 2008. Upon completion of the transfer transaction of the partnership's assets as aforesaid, Delek Energy USA paid on February 26, 2010 its share of the obligations for the hedging transaction of USD 5.7 million. It is noted that as at the reporting date, due to the decline in oil prices in 2008, AriesOne had negative cash flow from its production operations. In view of the foregoing, Delek Energy invested its relative share in the required financing in order to enable AriesOne to meet its liabilities and to continue its ongoing operations. This sum amounted to approximately one million dollars for the entire year, 2009. Upon transfer of the assets to be operated by Delek Energy USA, the ongoing handling of the assets and the investment plan for 2010 were examined. The average production volume of AriesOne in 2009 was 450 BOEPD (less royalties)

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2. According to the reserve report of January 1, 2010 from an independent foreign company for the appraisal of reserves in oil and gas reservoirs, the net proved reserves of AriesOne less royalties and less the share of third parties (100%) are as follows:1 Oil Natural gas (thousands of (millions of cubic barrels) feet) Proved, developed and producing reserves (PDP) 1,676 1,191 Proved, undeveloped reserves (PUD) 206 22 Total 1,882 1,213

Delek USA's share in the above reserves after exercise of the aforesaid transfer agreement, is as follows: Oil Natural gas (thousands of (millions of cubic barrels) feet) Proved, developed and producing reserves 1,330 1,095 (PDP) Proved, undeveloped reserves (PUD) 149 - Total 1,479 1,095

3. Operations in 2008 – 2009: In April-June 2008, one oil well was drilled at a budget of $600,000, which included production using an acid catalyst. The drilling was unsuccessful, and at the reporting date, the well is to be converted for water injection due to the production of other wells. The option for pouring water into productive wells in a specific area was studied and tested to increase the rate of oil production, however engineering works indicated that this was not financially viable. No additional development efforts were made during 2009. 4. Work plan and budget: As at the reporting date, there is no development plan for the assets other than the continuation of the ongoing production operations from the existing production assets, as aforesaid. 5. Management agreement: Concurrently with acquisition of the rights, the parties agreed on terms of the limited partnership and of the management agreement under which the general partner would manage operations of AriesOne through January 1, 2011. The contract was cancel with the manifestation of the forefgoing transfer contract. B. Alvord 1. On October 10, 2006 Delek USA signed an agreement with Jay Petroleum LLC (“Jay”), a company controlled by Isramco Inc., and McCommons Oil Company, a US company involved in the energy sector (in this section: “the Seller”).Under the agreement, Delek Energy USA and Jay each acquired 50% of the exploration and production rights for natural gas and/or oil in the Barnett Shale layer (at a depth of 2,100 m or more), over a total area of over 11 million sq.m. in Wise, Texas. In return for the rights in the Alvord project, Delek USA and Jay each paid the Seller a sum of $1.2 million. 2. Work plan and budget: The JOA outlined a preliminary work plan for a 3D seismic survey and two natural gas drillings to a depth of 7,000 feet were determined. Based on the results, the partners will consider additional drillings. The budget for these operations amounted to $5.5 million (for 100% of the rights).

1 According to the reserves report, these assets do not include quantities that are categorized as probable. For a definition of the terms, see the glossary at the end of the chapter.

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The seismic survey was conducted and analyzed in 2007 and the beginning of 2008 and subsequently a number of prospects were located for exploration drillings. The operator prepared a plan for the first drilling, however a date for commencement has not yet been set. 3. Joint operating agreement (JOA) In addition to signing the acquisition agreement, Delek Energy USA and Jay signed a JOA, pursuant to which Jay, wholly owned and controlled by Isramco, was appointed operator of the exploration project. C. Elk Resources LLC 1. On January 14, 2008, Delek Energy Systems LLC (“Rockies”), a wholly owned company of Delek USA, signed two agreements in which Rockies acquired the full share capital of Elk Resources LLC, USA (“Elk”) and the full rights in the loan taken by Elk from a hedge fund in the USA. The transaction was completed on February 11, 2008. In consideration of the acquisition of Elk, Rockies paid 95.5 million, of which $78.5 million was used to repay Elk's loan from the hedge fund. 2. Financing of the acquisition: The acquisition of Elk was fully financed by a $100 million loan (“the Loan”) to Rockies from the Bank of Scotland (“BoS”). The Loan is a revolver loan at (Reserved Base Lending) variable interest, for an inclusive period of 10 years. The scope of the loan principal is refixed every six months according to the influx of capital expected from the assets. As collateral for repayment of the Loan, Elk shares and assets and hedging transactions made by Rockies on oil and gas prices were pledged in favor of BoS. Delek Energy also placed guarantees in the amount of $30 million for two years. The financing agreement determined, inter alia, that if, during the guarantee period, Delek Energy’s market value falls by half or more of its value on the date of the Loan (February 11, 2008), BoS will be entitled to require the replacement of the company's guarantee with a financial guarantee. In addition, Delek Energy undertook to provide Rockies with the required financing (if required) for the development plan for Elk's profitable assets for 2008-2010 (which originally amounted to USD 90 million) and to indemnify BoS if, within one year, any material breaches in the Elk transaction are discovered. The Loan agreement includes numerous terms, including a provision that Rockies will comply with the financial relations, breach and immediate payment events, declarations and evidence. At the reporting date, Elk is negotiating with BoS to change several terms in the financing agreement, however the amended financing agreement has not yet been signed. It is further noted that Delek Energy is currently drafting the development plan and further investments in the Elk assets and the impact that the changes in the development plan will have on the scope of the BoS loan, including expected repayments. 3. As part of the financing transaction and the requirements of BoS, Delek Energy engaged in hedging transactions for oil and gas prices including put options to sell oil and gas at a fixed price as hedging against a decrease in oil and gas prices from March 1,2008 to December 31, 2011 and the sale of call options to purchase oil and gas at fixed prices for the same period. The total cost of the transaction amounted to $3.3 million. As a result of the decrease in gas and oil prices, the value of the transaction at December 31, 2008 amounted to $15 million. 4. Elk operations and assets: A) Elk is a private company registered in the USA. The company produces and sells oil and gas, develops existing oil and gas assets and conducts low-risk explorations for oil and gas. B) Elk has proved reserves at December 31, 2009 of 9.2 million barrels of oil and 2.5 BCF of natural gas (equivalent to 430,000 barrels of oil). Furthermore, Elk has additional probable reserves of significant volume as specified below. C) According to the reserve report of December 31, 2007, received from Netherland, Sewell & Associates Inc., an independent foreign company, the net proved and probable reserves of Elk (less royalties and less the share of third parties) are as follows:

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NGL Natural gas Oil Natural gas liquids (thousands (millions of (thousands of of barrels) cubic feet) barrels) Proved, developed and producing reserves (PDP) 1,880 410 30 Proven, developed and non - producing reserves 1,007 213 21 Proved and undeveloped reserves 6,359 1,851 78 Total proved reserves 9,246 2,474 129 Total proved + probable reserves 17,915 3,985 157

D) Elk’s production and exploratory rights cover an area of 215 sq.km. (net) in Utah and New Mexico in the USA. Elk's main asset is the Roosevelt field in northern Utah where most of Elk's proved reserves are located. At December 31, 2009, the Roosevelt field has 16 producing wells with proved, developed and producing (PDP) reserves of 2 million barrels and 3.1 million barrels of oil defined as proved non- producing reserves. E) Most of the producing wells were drilled in the mid-1980s and reach a depth of up to 14,000 feet. F) As accepted in the industry, exploration and production rights are subject to continuing exploration, development and production operations, and provided there is minimum production in the lease, the rights are maintained for the period of production from the well. In some of the areas, Elk shares rights with other companies, in different percentages. Elk is the operator of most of the assets and the drillings are conducted by external contractors. 5. Work plan and budget: In 2008-2009, Delek Energy took steps to significantly develop Elk's oil reserves, in order to increase its oil and gas productivity and to exploit the estimated commercial potential of its asset. Since its acquisition and until the report date, Elk drilled eight drillings (seven drillings in 2008 and two in 2009) and performed completion and development works of existing drillings, including development of geological strata for production. The investment in the foregoing operations amounted to USD 37 million in 2008 and to a total amount of USD 18 million in 2009. Forward-looking information: Delek Energy's above estimate regarding the development plan, including costs, schedules and results is forward-looking information. The information is based on the estimates of Delek Energy and is based on a range of factors, including estimates received from Elk professionals, estimated data of availability of drilling equipment, costs and schedules and on unproven geological and professional assumptions. The estimation may not be realized, if there is a change in the estimations of Elk’s professionals following drilling surveys and results and/or if there are changes in plans and/or whether or not a final agreement is signed with service providers and/or unexpected factors related to oil and gas drillings. The main factors are described in section 1.13.30 – Risk factors. 1.11.6 Oil production rights in the North Sea A. On April 26, 2007 Delek Energy Gibraltar signed an agreement with Noble Energy (Oilex) Ltd. (“Noble Oilex”), a subsidiary of Noble Energy Inc. Pursuant to the agreement, Delek Energy Gibraltar will acquire 25% of the rights in Block 21/20 F in the North Sea, covering an area of 22 sq.km. and located 190 km east of the coast of Scotland, adjacent to producing oil fields. Noble Oilex consolidated a drillable prospect in the license area. In return for the rights, Delek Energy Gibraltar undertook to cover 28.33% of the expenses of the first drilling in the concession area (without production test costs) and to bear its relative share (25%) of the other project expenses. B. Partners in the license: The license is shared by Noble Oilex (40%) and Dana Petroleum (E&P) Ltd. (“Dana Petroleum”), which signed an agreement with Noble Oilex at the same time as Delek Gibraltar. Dana Petroleum is a British oil company operating in the North Sea and with shares traded on the London stock exchange under the symbol DNX (35%). Noble Oilex is the project operator.

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C. Past operations: Geological and seismic surveys were conducted in the license area and ten years ago, a single drilling was conducted down-dip of the formation. The results of this drilling indicated signs of oil. On January 13, 2008 exploration drilling started in Block 21/20f. When the drilling reached a final depth of 2,697 m, logs and pressure tests were conducted. The project operator informed the partners that analysis of the log findings and pressure tests results indicate that the upper target layer does not contain hydrocarbons and that in the lower target layer, oil was discovered at a 4-5 m sandstone crosscut. Initial calculations conducted by the operator indicate that the quantity of recoverable oil discovered in the lower target layer is smaller that the minimum required for economic development of an oil field in the North Sea, and therefore the discovery is not commercial. Given the aforesaid, the partners accepted the operator’s recommendation to abandon the drilling without conducting production tests. Delek Energy’s share in the costs of the North Sea drilling amounted to NIS 26 million, which were recognized in Delek Energy’s income statement in the financial statements of the first quarter of 2008. 1.11.7 Acquisition of shares in Matra A. On March 29, 2007, Delek Energy International signed an agreement with Matra Petroleum PLC (“Matra Petroleum”). A company involved in oil exploration in Russia and Hungary. The company is registered in the UK and its shares are listed for trading on the London AIM (Alternative Investments Market). According to the agreement, Delek Energy International acquired 135,000,000 ordinary shares of Matra Petroleum at a price of 4.5 P each and a total investment of GBP 6.1 million. The market value of Matra on the AIM exchange shortly prior to the publication date of the report amounted to GBP 55 million. At the report date, Delek Energy International holds 29.3% of the issued and paid up share capital of Matra. B. Matra operates in Russia through a wholly owned subsidiary 'OOO' Arkhangelovskoe. 'OOO' Arkhangelovskoe holds oil rights in the Arkhangelovskoe license in an area 25 km from Orenburg, which is 1,200 km southeast of Moscow. The license refers to an area of 158 km2 adjacent to producing oil fields. On July 1, 2009 Matra announced that the licenses in Russia confirmed the modifications of the Arkhangelovskoe license borders for 'OOO' Arkhangelovskoe, (following the application that it submitted). So that fields in the north were added to the original license and fields to the west and east were removed so that the total area of the original license did not change (for the implications of this modification see section 4 C below) The revised license is valid until the end of 2010 and requires at the present time (after the two drillings, Arkhangelovbskoe 11 and Arkhangelovskoe 12), a further drilling and the start of another drilling (fourth) in the revised license fields. C. Past operations 1. The exploration drilling at Arkhangelovskoe 12 started on July 20, 2007. On November 6, 2007, Matra announced an oil discovery at Arkhangelovskoe 12 drilling (also known as Sokolovskoe), which is its first exploration drilling in Russia. The drilling reached a final depth of 3,890 m. Analysis of the drilling logs indicates that the producing layer (net) is 4- 7 m thick and that there is another possible profile containing Franski oil with a thickness of 5 m and a depth of 3,590-3,595 m. Drilling production tests produced light oil (API 37) at a rate of 960 barrels of oil per day. The tests indicated material damage to the producing layer during the drilling. A temporary production system and oil storage facilities were installed at the drilling site to enable oil production from the drilling, delivery to the nearby train terminal and its sale. Due to the attempt to prevent additional damage to the producing layer, only 100 barrels of oil a day were produced from the well. In view of the situation, Matra started acid treatment to restore the drilling. The acid treatment removed the structural damage to the layers near the drilling hole, which had restricted the production rate of the oil. The production test was performed after completion of treatment and cleaning. As part of the production test, the choke diameter was changed a number of times, resulting in different flow rates. Matra received an interim production license for one year and started to produce oil from the well. After a certain production period, the well started to produce excessive quantities of water and production was suspended. To renew oil production from the well, a workover is required at a total cost of $200,000. If the workover is successful, Matra expects production to reach 1,000 barrels per day. Matra applied for a permanent production license in the area of the discovery and the application is being processed. A temporary extension has been received recently for the interim production license, valid until August 31, 2009. The workover is contingent on finances available to Matra.

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2. Arkhangelovskoe 11 exploration drilling commenced on December 30, 2007, with the aim of examining the Laptevskaya formation at the western border of the license area. After drilling reached a final depth of 3,900 m, the cores were removed, logs were analyzed and two production tests were performed. The production tests did not produce oil and a decision was made to plug and abandon the oil drill. In 2007-2008, Matra processed and analysed the new 2D seismic surveys, reprocessed the seismic material in the area of the Sokolovskoe discovery and performed other technical tests. 3. Remapping Remapping based on the information accumulated in the processing and on the findings of Arkhangelovskoe 11 and Arkhangelovskoe 12 drillings indicated that at a the Sokolovskoe discovery in the revised license area is larger than originally estimated (see section 4 below) and that 50% of the discovery formation are located in the fields currently included in the revised license area.. 4. Matra's reassessment concerning the oil resources that can be produced from the Sokolovskoe discovery are as follows: Estimate Barrels of oil (millions) Low 15 Best 65 High 194

The announcement published by Matra included an internal indicative financial estimate that it made with regard to the Sokolovskoe discovery, which is based on oil reserves of 65 million barrels, an optimal development plan, the current fiscal conditions in Russia and global oil prices of USD 65 and USD 90 per barrel throughout the production period from the field, and on the assumption that the oil will be sold on the domestic market at 55% of the global price, the current indicative value, with 10% discounting for the project, is as follows: Current value at 10% Price per barrel (global) discounting per year USD 65/barrel. USD 300 million USD 90/barrel. USD 510 million

Notice regarding forward-looking information – the above estimates are all based on financial and other data and estimates, and on geological, geophysical and other information gathered by Matra, including from the drillings carried out in the Arkangelovskoe license fields. At this stage these are non-binding assessments and assumptions only, regarding which there is as yet no certainty, and they constitute forward-looking information. Delek Energy has not conducted any independent assessments or tests of the data, which was received from Matra, as aforesaid, and it does not present any opinion concerning them or their accuracy. The said assessments may be updated as additional information is gathered by Matra, if additional information is gathered, including as a result of further drilling in the revised license area and/or as the result of a range of factors connected to oil and gas exploration and production projects. 5. On July 7, 2009, Matra published an announcement concerning raising of capital in the amount of £ 5.35 million by way of a two-stage share issue. The capital raised will be used primarily to finance the Arkhangelovskoe 13 drilling, which is an assessment drilling under the Arkhangelovskoe license and to finance Matra's ongoing operations. Based on an early undertaking, Delek Energy International acquired 29.3% of the issued shares. Macquarie Bank Ltd. undertook to purchase 28% of the issued shares, whereby upon allocation the bank will hold 15% of Matra's share capital The offering drew surplus demand. 6. Matra operations in Hungary Matra operated in Hungary through Gemstone Properties Ltd. and held 40% of its shares. Gemstone Properties Ltd. holds, through a subsidiary, the full rights in the Inke concession and the Mezocsokonya exploration license in Hungary. During 2007, there were indications of gas in two drillings in the Inke concession, however the drillings were declared as non-commercial. On December 18, 2008, an

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agreement was signed for the sale of Matra shares (40%) in Gemstone Properties Ltd. to HHE America Ltd., which holds the balance of the shares (60%). Matra received $670,000 for the sale of these shares. 7. Work program in Russia: As aforesaid, Matra is operating under the revised exploration license which is valid until August 2010. To receive a permanent production license, Matra is required to conduct one drilling in the area and to start another drilling. On October 25, 2009, Matra began the Arkhangevskoe 13 drilling with the purpose of finding oil at a depth of 3,850 m. During the course of December 2009, when the drilling reached the depth of 740 m, a technical problem arose, which was caused by penetrating a stratum containing nitrogen gas. The drilling efforts were temporarily shut down so that the problem could be dealt with and appropriate conditions for continuing the drilling could be created. On February 17, 2010, Matra announced that the drilling contractor was replaced, the technical problems were solved and the drilling efforts were going forward. As at the date of the last report (from Matra) on February 17, 2010, the drilling reached a depth of 990 m and is expected to be completed during June 2010. Forward looking information: The abovementioned estimate of Delek Energy regarding the work plan, including project costs, schedules and results, is forward looking information. The information is based on the estimates of Delek Energy and on a range of factors, primarily on estimates received by Delek Energy from Matra, estimated data of availability of drilling equipment, costs and schedules and on unproven geological and professional assumptions. The estimation may not be realized, if there is a change in the estimates of Matra and/or if there are changes in plans due to results of surveys and drillings and/or if there are changes in plans determined and/or if agreements are signed with service providers and/or unexpected factors related to oil and gas explorations. The main factors are described in section 1.13.30 – Risk factors, below. 1.11.8 Acquisition of shares in Viking Oil and Gas International Ltd. ("VOGIL") A. In July 2007, Delek Energy International signed an agreement with Vogil (a private company) to invest $14 million in return for allocation of 24.2% of Vogil shares. Vogil holds shares in two companies: (1) Vanguard Field Development Solutions Pte Ltd. (VFDS), a wholly owned subsidiary listed for trading and operating in Singapore with its main assets being two oil tankers; (2) 83,617,000 of the shares of Nexus Energy Ltd. (“Nexus”), a public energy company in Australia traded on the ASX under the symbol NXS, representing 8.7% of the issued and paid up share capital of Nexus. B. VFDS When Vogil shares were acquired, VFDS focused on converting leasing and operating floating production, storage and offloading platforms (FPSO) VFDS owned two oil tankers, Viking Crux and Vanguard Viking 1, with capacities of 1,100,000 barrels and 650,000 barrels, respectively, which were purchased in 2007 and 2008 with BoS financing in the amount of USD 81.5 million, and which were put up as collateral for the loan. Due to the foregoing developments and the continuing global crisis in 2008, VFDS cancelled the conversion of the tankers to FPSO. According to VOGIL's notification to Delek Energy, in view of the fact that VFDS was unable to meet the loan repayments, the bank exercised its rights and seized the tankers and sold them. Delek Energy is not a guarantor for this loan. Furthermore, to the best of Delek Energy's knowledge, VFDS has liabilities to other creditors, which are not covered by insurance, in the amount of USD 1 million . C. Purchase of shares in Nexus During 2007, Vogil acquired 68,700,000 shares of the Australian energy company, Nexus for USD 81 million. In order to acquire Nexus shares, Vogil received a bank loan from the Bank of Scotland (BoS) in the amount of USD 57 million. The total unpaid debt is currently USD 44.7 million. Delek Energy has guaranteed 24.2% of this debt, which should have been paid up by the end of July 2009. VOGIL is currently holding negotiations with BoS concerning the settlement of the loan, however as at the reporting date, a binding agreement is yet to be signed. Delek Energy estimates that VOGIL's maximum exposure for the said loans is total loss of the shares that were attached as part of the transaction (68.7 million shares) and an additional

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payment which is expected (based on the value of the collateral shortly prior to the date of this report) to amount to USD 26.3 million. As at the date of publication of the report, Delek Energy's share in VOGIL's debt balance for aforesaid collateral (less the securities that were attached in favor of the bank) amounts to USD 6.4 million, for which full provisions were made in Delek Energy's books . In 2007 VOGIL acquired 14,917,000 additional shares of Nexus, without additional financing. In 2008, Vogil signed a contract for difference (“CFD”) for an additional 12,350,000 Nexus shares for the equivalent of AUD 21.24 million. The CFD was made with Kaupthing Singer and Friedlander Bank (“KSF”). As collateral for the CFD, Vogil attached 14,917,000 of its Nexus shares and KSF was given the shareholders' guarantees and financial guarantees for 25% of the value of the CFD. On October 8, 2008, the High Court of England issued an administration order for KSF. VOGIL gave notice that it received a demand from KSF to pay differentials with respect to the CFD transaction described above, in the amount of AUD 16.5 million (before deduction of the securities mortgaged to the bank). In addition, KSF filed a suit against VOGIL in this matter. VOGIL disputes the manner of computing of the foregoing demand and filed a statement of defense accordingly. Delek Energy estimates, based on the information received from VOGIL, that its share in VOGIL's debt with respect to the collateral, which was given for the CFD transaction as aforesaid (if KSF's lawsuit is accepted in full, and less the tradable securities that were mortgaged to the bank, based on their value shortly prior to the date of this report) and for which provisions were made in Delek Energy's books, are AUD 2.9 million. On June 5, 2008, Delek Energy International purchased, as part of an allocation to various organizations, 9,350,000 Nexus shares, representing 1.46% (and which currently constitutes 1%) of Nexus's shares, for AUD 16 million. To purchase the Nexus shares, Delek Energy International signed a repo contract with KSF, under which it received a loan of 50% of the purchase cost. At the report date, Delek Energy International has repaid the loan. Forward looking information: The abovementioned estimate of Delek Energy regarding Delek Energy's exposure to VOGIL and VFDS debts, is forward looking information. The foregoing information is based on Delek Energy's assessment, based on a range of factors, primarily the estimates Delek Energy received from VOGIL and from its legal counsel, as well as unproven assumptions (it is noted that Delek Energy is unable to carry out independent assessments of the foregoing information). The foregoing estimation may not be realized, if there is a change in VOGIL's assessments and/or if there are changes in plans and/or if there will be changes in the repayment ability of the foregoing companies and/or the demands of the financing bank and/or of a range of unexpected factors, including changes in the market conditions. In view of the foregoing, VOGIL's operations were terminated during the course of 2009. Delek Energy erased its investments in VOGIL and recording its obligations with respect to the losses from the guarantees it provided. 1.11.9 Other projects Delek Energy is also currently working to identify and investigate additional investment opportunities in oil and gas exploration, development and production worldwide. 1.11.10 Products and services At the report date, the Limited Partnerships supply natural gas from the Mari reservoir to IEC, Paz Refineries Ashdod, Hadera Paper and Delek Ashkelon and the ICL Group. Furthermore, the Lmited Partnerships signed letters of intent to sell natural gas from the Tamar project to other customers (see section ___ below). In the USA, oil and gas are commodities. The US market is large and sophisticated and Delek Energy is able to contract with a wide range of customers. As gas and/or oil is found in the exploration operations of Delek Energy (through its subsidiaries) and/or the limited partnerships, Delek Energy will act to sell them. 1.11.11 Breakdown of revenue and profitability of products and services Most of Delek Energy’s revenue and profits at December 31, 2009 are derived from the sale of natural gas and royalties from the Yam Tethys project. The balance of Delek Energy's revenue comes from the AriesOne and Elk concessions. Delek Energy’s share in AriesOne revenue from the sale of oil and gas (net, less royalties) amounted to

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NIS 30 million in 2009 and NIS 494 million in 2007. Revenue of Elk from the sale of oil and gas (net, less royalties) amounted in 2009 to NIS 50.4 million and to NIS 39.5 million in 2008. 1.11.12 Customers A. Customers in Israel At the report date, the Limited Partnerships (together with other partners in the Yam Tethys project) have contracts to provide natural gas (with IEC, Paz Refineries Ashdod, Hadera Paper Mills, Delek Ashkelon and ICL Group) totaling 28.9 BCM, which account for 85% of the natural gas reserves (proved) in the Yam Tethys project gas reservoirs (see the table in section 1.13.2). At December 31, 2009, 14.38 BCM were supplied. The Partnerships' revenues from IEC accounted for 93% of revenues in 2008 and 91% of revenues in 2009. Delek Energy is dependent upon IEC, since cancellation or termination of the contract with IEC would materially impact Delek Energy’s operations and profitability. For details of the agreement with IEC, see section 1.13.26A. For a summary of the Limited Partnerships’ agreements for the sale of natural gas, see section 1.13.26. Other potential customers of the limited partnerships in Israel are customers in the electricity sector and material industrial customers, as well as private power plants. B. Customers in the United States In 2008-2009, AriesOne and Elk sold oil and natural gas to numerous customers, since in the USA, oil and natural gas are commodities with prices determined primarily by global fluctuations in supply and demand. The US market is large and sophisticated and Delek Energy is able to contract with a wide range of customers. No single customer in the USA accounts for 10% or more of Delek Energy’s total revenues. As aforesaid, at the reporting date, Elk has two main customers (refineries located in the production areas) to which Elk supplies most of the oil that it produces. Similarly, Delek Energy's other customers in the US (sales through AriesOne) are not specifically classified. 1.11.13 Marketing and distribution A. The Yam Tethys project and Tamar project partners are taking steps to market gas from the Mari, Noa, Tamar and Dalit reservoirs to potential customers and are at various stages of negotiations with IEC to supply additional quantities of natural gas. There is no certainty that these negotiations will culminate in signing of additional binding agreements for gas delivery. B. Delivery of gas to additional customers also depends on the completion of the Israel Natural Gas Lines (INGL) national gas pipeline. At the reporting date, INGL has yet to complete the pipeline for the delivery of gas to customers and to any additional IEC power plants that are planned to operate on natural gas and to other potential customers. At the reporting date, the power stations and the partnerships' customers connected to the national pipeline are as follows: Delek Ashkelon, Paz Refineries Ashdod, Hadera Paper, ICL Group and the IEC power stations in Ashdod, Tel Aviv (Reading),Hadera and Hagit. It is noted that INGL has recently started to transmit natural gas through the pipeline to the Hagit power station, which is expected to start using natural gas in April 2009. C. The US oil market is highly developed, with proper infrastructure for delivery of oil and/or gas. Therefore marketing and distribution are conducted with existing infrastructure, and Delek Energy is not required to make any material investments in additional facilities. D. The oil produced by Matra in Russia is sold at the mouth of the well to the competitive local market at local prices. If production is more significant, the oil will be transmitted by Matra to the refineries and distributed to the broader market at more attractive prices. Delek Energy estimates that marketing and distribution will be through existing infrastructure, and Matra will not be required to make any material investments in additional facilities. 1.11.14 Order backlog For binding contracts by the Limited Partnerships for delivery of natural gas, see sections 1.13.26.A, 1.13.26.B. At the report date, it is not possible to estimate at a high certainty level the forecasted gas consumption under current contracts for sale of gas, primarily due to the uncertainty and possible delays in schedule for connection of additional power plants to the gas pipeline system in view of the uncertainty of the supply of natural gas to IEC by EMG and the prices of coal supplied to IEC. For this matter, see section 1.13 below. For the minimum quantity which IEC has committed to purchase from the partnership, see section 1.13.26.A(8).

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Below the minimum annual quantities for 2009-2010 determined in the agreement for supply of natural gas:1 Minimum total annual quantity in the contracts (BCM) 2010 2011 1.92 2.8

1.11.15 Competition In Israel, a number of parties have been operating for years in the sale of natural gas. The sale of natural gas is primarily intended for local markets, therefore the competition is with parties operating in those markets. In addition to the Yam Tethys group, there is one other group supplying natural gas in the Israeli market: the East Mediterranean Gas Company (“EMG”). EMG imports gas from Egypt and has an agreement for the supply of gas to IEC (according to the media, EMG has agreements with other customers). In May 2008, EMG began transmitting natural gas through the natural gas pipeline and supplying it to IEC. Furthermore, to the best of our knowledge, British Gas (“BG") discovered natural gas reservoirs off the Gaza shore. These reservoirs are of similar size to current discoveries at Yam Tethys (and are yet to be developed). In view of the commercial discovery at the Tamar project, and on the assumption that the discoveries will be developed, the Tamar project partners (including the partnerships) are expected to become in the coming years a significant supplier of natural gas on the Israeli market. Natural gas suppliers also compete with other fuels, including coal, and the level of gas consumption and price are affected by the prices of these fuels. In addition, in the future, there could be import of LNG to the Israeli market (see also section 1.13.2(J) below). Oil sales are less limited to local customers, and may be made on the global markets, therefore there is higher competition, but also more sales options. However, oil is a commodity with a price dictated by global fluctuations in supply and demand, therefore competition with other oil producing companies is not expected to have a material impact on the oil sales of Delek Energy. 1.11.16 Seasonality In Israel, IEC’s gas consumption fluctuates, inter alia, with seasonal changes in demand for electricity and with IEC’s maintenance plan. In the third quarter of each year (the summer months) power consumption is highest, followed by the first quarter (the winter months), therefore IEC consumes more gas in these quarters. The table below shows the breakdown of natural gas sales over the past two years: Q1 (BCM) Q2 (BCM) Q3 (BCM) Q4 (BCM) 2008 0.9 0.7 0.9 0.8 2009 0.6 0.5 0.8 0.6

The seasonal effect of gas and oil consumption by customers in the USA does not have a material effect on Delek Energy’s revenues from projects in the USA. 1.11.17 Facilities and production capacity Yam Tethys project The production system of the Yam Tethys project includes a production platform, a 42-km offshore pipeline of for transmission of gas, and a permanent reception terminal, which was completed in 2008. The production platform and permanent reception terminal has a planned annual supply capacity of 6 BCM of gas. The production platform is anchored to the seabed in 236 meters of

1 Based on the minimum contract quantities according to contracts with IEC, Paz Ashdod, Delek Ashkelon, Hadera Paper and ICL. Delek Energy estimates that actual quantities could be higher. 2 The increase in the minimum annual contract quantity for 2010 is based on the commencement of delivery to the ICL Group, calculated in this table as commencing from 2010.

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water. The upper part of the production platform, above sea level, contains all the platform decks. The four decks, 60 m long and 35 m wide, contain, inter alia, production facilities planned for maximum gas supply of up to 600 million cu. feet per day, equal to 6 BCM per year. In practice,3.5 BCM were produced in 2008 and 2.9 BCM were produced in 2009. The platform also includes generators, a place reserved for future installation of compressors, connection outlets for a gas delivery pipeline, gas well heads, space for a drilling machine, helipad, employee living quarters and work area, a raised gas removal facility, antennas, fire extinguishing facilities, life boats and security devices, measuring and other facilities associated with the platform production and handling system. AriesOne has production and storage facilities in the different production areas in which it operates. Elk has production, handling, storage and delivery facilities in the areas in which it operates and owns a natural gas pipeline. In the Sisco field, Elk owns a system of compressors, handling facilities and measuring infrastructure for natural gas produced in the area by Delek Energy and by others. In 2008, Delek Energy invested $0.4 million in gas treatment facilities in the Cisco field and in 2009 no additional investments were made in the facilities.. 1.11.18 Human resources A. Up to mid-2007, Delek Energy had no employees and operated mostly through external service providers and experts. At the report date, Delek Energy has five employees, including a CEO, CFO, VP business development and administration staff. In addition, Delek Energy and its subsidiaries receive management, administrative and financial services from Delek Investments. The company also receives professional consultation service from various consultants, including geologists, geophysicists, lawyers, media consultants and financial advisors, as required. Delek Drilling Management receives consulting and management services from one manager, under a consulting and management agreement. At the reporting date, the limited partnerships do not have any employees (other than an administrative assistant at Avner partnership) and are managed by the general partners pursuant to the Limited Partnership agreement of each partnership. The general partners provide management services for the Limited Partnerships, including management (directors of the general partner), accountant, bookkeeping and office services. In addition to management of the general partner, the Limited Partnerships use the services of consultants (including attorneys, geological and financial consultants) as required. It is noted that under operating agreements in various projects to which Delek Energy is partner, the project operator employs staff for management and operation of the projects and operators. There are no employee- employer relations between employers of the project operator and Delek Energy, and Delek Energy has no direct liability for severance. B. Delek Energy USA and Elk: At the reporting date, Delek USA and Elk have 20 employees, including accountants, geologists, geophysicists, engineers, administrative staff and maintenance staff. Of these, seven are officers and senior management. C. Employment terms of the CEO: Delek Energy's CEO, Mr. Gidon Tadmor, is employed by way of a service contract that awards a monthly salary, reimbursement of expenses and company car. On August 20, 2007 Delek Energy’s board of directors approved an allocation for the CEO of 258,265 unquoted options exercisable for 258,265 Delek Energy shares. If the CEO exercises all the options, the shares will constitute 5.3% of Delek Energy’s issued and paid up share capital and the offeree will hold 5.39% of Delek Energy’s fully diluted issued and paid up share capital. To exercise the options, the CEO will be eligible for a loan from Delek Energy at 4% annual interest and linked to the CPI on the date of the loan. The loan will be a non-recourse loan that will be solely secured by a first-degree pledge on the exercise shares. The financial value of all the options allocated to the CEO, including the non-recourse loan, based on the estimated value of the options, is NIS 32.126 million. For additional information regarding the employment terms of Mr. Gidon Tadmor, see particulars based on Regulation 21 in Chapter 4 of the periodic report. For details of allocation of options to the former chairman of Delek Energy, Mr. Gabi Last, currently serving as vice chairman of the board of directors of the Group, see particulars based on Regulation 21 in Chapter 4 of the periodic report On January 17, 2010, Dr. Yoram Turbowicz was appointed as a director and as chairman of the board of directors of Delek Energy (effective from February 1, 2010). Under Dr.

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Turbowicz's employment contract as approved by the general meeting of Delek Energy's shareholders, the scope of Dr. Turbowicz's position as chairman of the board of directors is 66% His monthly salary shall be 66% of the salary of the CEO as shall be determined from time to time1. As of the date of confirmation of Dr. Turbowicz’s employment contract, his gross monthly salary was NIS 54,674. Dr. Turbowicz’s salary is linked to the CPI and is updated every three months. On account of his position as chairman of the board of directors, Dr. Turbowicz is entitled to sickness leave, annual leave, recuperation pay, further education fund and a pension plan. Delek Energy will also make available a car for Dr. Turbowicz and associated benefits such as his inclusion in insurance arrangements, indemnification as an officeholder, and reimbursement of expenses incurred in carrying out his duties. The employment period is 4 years commencing February 1, 2010, with both parties being entitled to terminate the contractual relationship at any moment by prior notice of 4.5 months. Dr. Turbowicz shall be entitled to an annual bonus that shall be determined by the board of directors of Delek Energy. Dr. Turbowicz shall be entitled to options (a package of phantom units) amounting to 2% of Delek Energy’s issued and paid up share capital as of the date of approval of the contract – 100,108 phantom units in four equal tranches according to the dates and amounts as detailed below: Size of tranche Entitlement date Exercise date Exercise period First tranche At the end of two (2) years from Up to 24 months commencing as Chairman of A = NIS from vesting date 0.5% Delek Energy (“First Entitlement 1007.0 of first tranche Date”) Second At the end of two (2) years from Up to 24 months tranche commencing as Chairman of from vesting date 0.5% A + 5%A = B Delek Energy (“Second of second Entitlement Date”) tranche Third tranche At the end of three (3) years Up to 12 months from commencing as Chairman from vesting date 0.5% B+ 5%B = C of Delek Energy (“Third of third tranche Entitlement Date”) Fourth At the end of four (4) years from Up to 90 days tranche commencing as Chairman of from vesting date 0.5% C+ 5%C = D Delek Energy (“Fourth of fourth tranche Entitlement Date”)

The “Exercise Price” shall be NIS 1007.0 for each phantom unit of the first tranche, which is the Delek Energy share price on the trading day when this contract was approved by the board of directors, namely January 17, 2010, with an uplift of five percent (5%) for each tranche from the second tranche onwards. The Exercise Price shall be subject to adjustments on account of the distribution of cash dividends during the tranche year. 1.11.19 Suppliers and raw materials A project operator is appointed for each drilling project in which Delek Energy has rights. The operator contracts with professional contractors, which have the relevant equipment, for each project. There are no contractors in Israel involved in drillings or offshore seismic surveys of the type conducted by the limited partnerships together with their partners in the various projects. Therefore, the partnerships need to contract with foreign contractors for the necessary services. Offshore drilling equipment is transported from all over the world according to availability, project type and special needs of each project. Another important parameter that has impact on this matter is the price of crude oil so that for example, an increase in global oil prices in 2008 led to an increase in demand for service providers in the energy sector, leading to a significant increase in project costs and to reduced availability of contractors and required equipment and visa versa. Delek Energy does not directly contract with suppliers or professional contractors, and such contracting is left to the project operators. Metal is a significant raw material in exploration facilities, as it is used for pipes, drill bits and platform structures. Global metal prices have increased significantly in recent years. An example of the foregoing is the drilling budget for Tamar 1, which

1 It should be noted that the calculation of Dr. Tirbowicz’s salary in relation to that of the CEO of Delek Energy is purely for the purposes of the salary element and not in respect of any other elements.

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increased from $71 million in November 2006 to $140 million at the time of the drilling in 2008 (see section 1.13.3A). 1.11.20 Working capital A. Revenues of the limited partnerships from the IEC contract are received by the 20th of the invoicing month or 15 working days from the invoicing date for gas supplied in the previous month, whichever is later. Payments of the partnership to operators of the joint ventures are made under the terms in each operating agreement. B. AiresOne and Elk revenues from oil sales are received within 30 days from the end of the month in which the sale was made. 1.11.21 Financing A. Delek Energy’s operations are financed primarily by long-term loans provided by Delek Investments and a long-term loan extended a subsidiary. Delek Energy has debentures guaranteed by the Delek group, financed by a bank loan received in Israel and from foreign banks and from debentures sold in the United States and in Israel as stipulated below. Delek Energy examines from time to time options for receiving finance in Israel from the banking system and/or by way of the capital market. It is noted that there is no certainty that Delek Energy will receive additional financing as aforesaid. On October 10, 2007, the general meeting approved an agreement for receiving finance from Delek Investments, under which Delek Investments will provide loans and guarantees for Delek Energy ("the Agreement"). B. In 2008 and 2009, Delek Energy engaged with local banks to receive credit. As of December 31, 2009, amounting to $151 million with variable annual Libor interest + 1.75%-4.65%, for repayment in 2009 through 2013. To guarantee the loan, Delek Energy recorded a specific charge on part of the participating units in the limited partnership and undertook to comply with certain financial criteria as set forth below. Delek Energy undertook financial covenants with respect to the long term loans from Israeli banks which at December 31, 2009 amounted to approximately NIS 151 million, as follows: (1) the total equity of the Delek drilling partnership and Avner partnership shall not drop below the amount of USD 60 million and USD 70 million, respectively; (2) the ratio of equity to balance sheet of the Delek drilling partnership and Avner partnership shall not drop below 30% and 35%, respectively; (3) The equity of Delek Energy with the addition of loans received from the parent company shall not be below the amount of NIS 250 million; (4) the ratio of equity plus loans received from the parent company to balance sheet shall not be lower than 25%; (5) a debt collateral ratio of 50% - 56%; (6) as at reporting date and shortly prior to date of publication of the report, Delek Energy is in compliance with the foregoing financial covenants. C. The scope of the charged participating units as at the balance sheet date on behalf of loans received from banks is 90% of the participating units held by Delek Energy in the Delek drilling partnership and 66% of the participating units held by Delek Energy in the Avner partnership. It is noted that, under the agreements with the banks, Delek Energy is able to release a significant number of the charged participating units from, but such release is yet to be executed. Furthermore, as set forth below, subsequent to Delek Energy's balance sheet date, it repaid loans to the banks in an amount that enables release of charged participating units amounting to 40% of Delek drilling partnership. In January 2010, Delek Energy repaid, by way of early settlement, loans received from Israeli banks in the amount of USD 30 million, following agreement concerning the provision of a flexible line of credit in a similar amount, and repaid USD 12 million of its existing total dollar loans, according to the original repayment date. During the course of July through November 2009, Delek Energy repaid loans received from its parent company in the amount of NIS 190 million, on their repayment date. See section E below concerning changes in the terms of the loans received from the parent company. In addition, during 2008, Rockies signed an agreement with a foreign bank to receive a loan in an overall amount of USD 100 million for a period of 10 years at variable interest of Libor + 1.65% - 3.05%. Delek Energy currently acts to obtain approval for an additional line of credit from local banks and to receive financing from institutional organizations against attachment of specific assets that it owns. Nonetheless, it is not at all certain that the aforesaid financing will be obtained.

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On July 1, 2009, Delek Energy issued to classified investors, USD 20,000,000 registered par value Debentures (Series B) bearing annual interest of 7.9% for a period of 5 years. The terms of the debentures stipulated that the repayment dates of the debentures (principal and interest) will be accelerated and brought forward in certain cases, dependent upon the annual quantity of gas that will be produced from the oil assets in the Yam Tethys transaction and Delek Energy shall be entitled, at its sole discretion, to make early repayment (in full or in part) of the debentures, at any time. To secure its full and precise compliance with all the terms of the debentures, Delek Energy attached its rights to receive royalties from the Delek drilling partnership for the oil assets in the Yam Tethys transaction. Furthermore, Delek Energy attached all its rights under the insurance policy covering cessation of payment of royalties from Delek drilling partnership to Delek Energy (see section 1.11.29 below) In addition, in October 2009 and in January 2010, Delek Energy issued to the public Debentures (Series C-E) at total par value of NIS 700 million. To secure its full and precise compliance with the terms of the Debentures (Series C-E), Delek Energy attached the participating units in the limited partnerships that it owns. D. Average interest rates Below is the average interest rate on loans from bank and non-bank sources that were in effect in December 2009 and are not intended for the exclusive use of Delek Energy:

Interest rate Bank financing Dollar loans LIBOR + 1.65-4.65% Non-banking financing Long-term index-linked loans CPI + 4.3% – 6.5% from Delek Investments Dollar debentures at fixed 5.326%-7.9% interest Dollar debentures at variable LIBOR + 1.1% interest Shekel index-linked debentures CPI +5.19% - 7.75%

E. The unpaid balance of the loans (principal and interest) granted to Delek Energy and its subsidiaries by Delek Investments as of December 31, 2009 amounted to NIS 523 million. It is noted that the foregoing amount received from Delek Investments, constitutes part of the total amount noted in the framework agreement. On March 3, 2010,, subsequent to receiving the approval of Delek Energy's board of directors and the audit committee on January 20, 2010, the general meeting approved changing the terms of Delek Energy's existing debt to Delek Investments, so that the entire balance of the loans from Delek Investments will be consolidated into a single loan under the following terms: (1) the loan period will be from the date of the approval of the general meeting through to September 30, 2014; (2) the loan principal will be repaid by Delek Energy in five unequal installments; (3) the unpaid balance of the loan principal will bear fixed annual interest of 7.25%, which will be repaid twice a year on March 31 and September 31 of each year from the date of approval of the loan by the general meeting through to September 30, 2014; (4) The loan principal and interest on the loan will be linked to the consumer price index. The unpaid balance of the new loan as aforesaid, as at March 3, 2010 (date of approval of the changes in the terms by the general meeting) is NIS 523.9 million. These loans are not secured by liens and Delek Energy has the right of early repayment of these loans at any time and without penalty. Should Delek Energy decide on a public issue and/or a rights issue and/or a private placement ("the Issue"), Delek Investments will be entitled to call the total unpaid balance of Delek Energy's debt for immediate repayment (including interest, linkage differentials and VAT), to a net maximum amount that will be raised by Delek Energy in the issue, and this immediately upon receipt of the proceeds from the issue. In such a case, Delek Energy shall not be charged commission for early repayment. Delek Investments shall be entitled to demand that Delek Energy execute such issue, whereby the proceeds are intended for repayment of the balance of Delek Energy's debt. Should Delek Investments cease being the controlling shareholder in Delek Energy, the entire unpaid balance of Delek Energy's debt shall be repaid immediately, including interest, linkage differentials and VAT. In such a case, Delek Energy shall not be charged commission for early repayment. F. The unpaid balance of the loans (principal and interest) granted to Delek Energy by its subsidiary, Delek Energy Bonds as of December 31, 2009 amounted to NIS 16 million bearing

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average annual interest of 7.75% (linked to the CPI). It is noted that Delek Group guaranteed these debentures. It is also noted that Delek Energy has placed a lien in favor of Bank Leumi Trustees Ltd., which serves as trustee for holders of debentures issued by Delek Energy Bonds, on its rights to super royalties from Delek Drilling Partnership as collateral for redemption of debentures issued by Delek Energy Bonds. G. Oil exploration operations (unlike production and development) of the limited partnerships is wholly financed by the shareholders’ capital of the limited partnerships, raised pursuant to prospectuses for public offering of rights published by the limited partnerships. Pursuant to a permit granted by the Income Tax Authority to the partnerships close to the date of their establishment, the limited partnerships have committed not to obtain loans exceeding 2-3% of the amount raised from investors in the partnerships without prior consent of the Income Tax Authority. In view of Tamar project, the additional investments in they Yam Tethys project and further exploration efforts, the partnerships are expected to require large sums of money for their operations, and this in accordance with the work plan and budgets that will be approved from time to time under the joint operating agreements applicable to the oil assets that they hold. H. The partnerships intend taking action to raise financial means required to meet their foregoing liabilities, in one or more of the methods set out below: It is noted that there is no certainty that the partnerships will receive financing as set forth below: 1. The partnerships are conducting negotiations with two foreign banks to receive non- recourse interim finance for part of the investments in the Tamar project, and which will be secured by a pledge on the project assets. 2. The partnerships intend continuing their efforts to exchange the above interim financing with a long-term non-recourse project loan. Under this financing, the partnerships are required to furnish the financing organizations, inter alia, with reserve report drafted by an independent consultancy company, an approved development plan to be executed by the project partners and signed agreements to sell natural gas in a quantity require for the financing. 3. Raising interim financing based on the partnerships' expected available cash flows from the sale of natural gas in the Yam Tethys project, and this in accordance with the agreements that are not attached under the project financing, which the partnerships carried out in 2005. it is noted that the receipts from the initial agreement signed in 2002 with IEC were attached under the abovementioned project financing. This interim financing was intended to enable the partnerships to comply with the cash flow requirements for their operation, inter alia, as part of the Tamar project development and this until the project financing for the project was concluded. 4. Raising of funds by the Partnerships by way of a rights issue in the Partnerships. It is noted that, should Delek Energy decide to maintain the rate of its holding in the partnerships, it will have to participate in the forgoing efforts to raise capital and to inject the funds required for its relative share in the partnerships. It is noted that there is no certainty that the partnerships will receive financing as set forth below: I. On March 9, 2005 agreements to obtain non-recourse financing for the share of Israeli partners in Tam Tethys project (the partnerships and Delek Investments and Properties Ltd.) were concluded, totaling $275 million. The shares of Delek Drilling Partnership and Avner Partnership in this amount is $130 and $120, respectively. The capital was raised by a special purpose company (SPC), Delek and Avner Yam Tethys Ltd. (hereinafter in this subclause: SPC), which issued to institutional investors in the USA, pursuant to Rule 144A, debentures in the total amount of $275 million (the SPC debentures) of which $175 million at fixed interest of 5.326% per annum, and $100 million at variable interest of 3-month LIBOR plus a margin of 1.1% per annum The debentures will be paid every quarter until August 1, 2013 according to a payment table (based on the estimated expected gas supply to IEC). Notwithstanding the foregoing, in the event of increased consumption of the IEC beyond the forecast, partial early redemption will be carried out of the SPC debentures at variable interest, without early redemption commissions. On the other hand, non-redemption of the debentures at the dates specified in the payment table, due to lower than expected consumption by IEC, subject to meeting a minimum, will not be considered as breach of the SPC debentures. To guarantee the payment of the SPC debentures, the partnerships, Delek Investments and the SPC pledged their rights in the following assets: the Ashkelon lease and the license to operate the rig, the IEC agreement, the JOA (in respect of the IEC agreement, the rig and other equipment

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used to produce gas for the IEC), insurance policies, shares of Yam Tethys (license holder of pipeline), hedging agreements and SPC bank accounts (which include, inter alia, the revenues account in which proceeds from the IEC will be deposited and accounts in which collateral was deposited, including, collateral for debt and collateral for constructing the reception terminal). The loan based on the debentures is a non-recourse loan, with the exception of assets charges as aforesaid. It is noted that the agreements for the sale of gas with other customers and the Noa lease are not included in the pledged assets. J. Credit limits: In addition to the abovementioned collateral pertaining to the SPC, the Israeli partners have undertaken several covenants towards the investors in SPC Debentures, including, inter alia, the following1 1. Not to reduce their share of the Ashkelon lease 2. Not to vote in the operating committee in favor of any additional operations not intended for production of gas to be supplied to IEC (hereinafter in this sub-section: additional operations) unless one of the following conditions exists: A) The partnerships have all the financial means for financing the additional operations in full and the partners authorized the trustee of the SPC bonds in writing that the said financial means are available and are intended for the additional operations until they are completed in full. B) ♠The vote in favor of the additional operations was approved by a majority of SPC debenture holders C) Rating agencies have confirmed that commitment to undertake the additional operations will not have an adverse effect on the rating 3. Not to commit nor agree to expand or modify the production system, unless conditions stipulated by the financing documents are met. K. Credit facilities: In addition to the above financing, Delek Energy has current credit facilities of non-material scope. 1.11.22 Taxation A. For details of taxation of Delek Energy profits, see Note 42 to the financial statements. B. The partnerships are not taxed under the Income Tax Ordinance (Revised), 5721-1961 ("the Ordinance") and revenues, expenses, profits and losses of each partnership are assigned to the general partner (pro rata to its share in the Partnership) and to unit holders (including Delek Energy) which are "eligible holders" pro rata to their share of holdings in the Partnership. An "eligible holder" is any entity holding participation units on December 31 of the tax year. C. An eligible holder is subject to the provisions of Section 63 of the Ordinance and to Section 13 of the Income Tax (Adjustments for inflation) Law, 5745-1985. Accordingly, the share of Partnership revenues payable to each eligible holder for the tax year, including their share of the Partnership's exploration and development expenses, under the Income Tax (Deductions from revenues of holders of oil rights) Regulations, 5716-1956, will be considered to be income and/or expenses of the eligible holder, and are to be included in the income report submitted pursuant to the Ordinance. D. In October 2004, the partnerships signed an agreement with the Income Tax Authority in respect of withholding tax by the Limited Partnerships.Under the agreement, the Limited Partnerships undertake, under certain conditions, to pay the required tax annually, for the taxable revenues of the eligible holders of participation units, arising from revenue of the Limited Partnership assigned to them, as set forth above. The tax payment will constitute an advance tax payment on behalf of the unit holders, and will be deducted from the Partnership capital. 1.11.23 The environment Drilling and production operations carry environmental risks associated with oil gushing and/or oil spill and/or natural gas leak. In Israel, the Petroleum Law and its regulations stipulate that, inter alia, the drilling shall be accomplished with due caution so as to prevent infiltration of liquids and

1 Delek Energy estimates, as at the report date, that the Israeli partners comply with the foregoing restrictions.

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gases into the ground or uncontrollable gushing, as well as to prevent their penetration from one geological layer to another. Furthermore, it is forbidden to abandon a well unless it is plugged in accordance with instructions of the Petroleum Commissioner. As set forth above, under licenses and permits obtained by the Yam Tethys project partners in connection with construction of the project’s production system, the partners are required to operate in compliance with environmental protection standards set forth in the licenses and permits. Delek Energy’s operations abroad are also subject to standards and legislation pertaining to environmental protection, under laws of each country where operations take place. With the exception of Elk, Delek Energy and/or its wholly owned subsidiaries do not serve as operator in any of the projects in which it is involved, and subject to operating agreements applicable to the various projects, the operators are required to comply with the relevant laws. The cost of operations related to environmental protection is included in the budgets for the different projects. At the report date, no additional material costs are anticipated. Delek Energy is not aware of any non-compliance or deviation from the ecological requirements in the projects in which it is involved. 1.11.24 Restrictions on and supervision of operations A. Israel In Israel, oil and gas exploration and production are regulated primarily under the Petroleum Law, 5712-1952 and its amendments. Exploration is conducted under permits, licenses and leases (as defined in the Petroleum Law), which are granted by the competent authorities and include work plans, schedules and restrictions. The Petroleum Law also stipulates that a lease owner must pay the State royalties equal to one eighth of the oil produced in the lease area, but no less than the minimum royalties stipulated by the law. Oil rights may be revoked if the holder of the right fails to comply with the provisions in the law or the terms of the oil right. In Israel, transmission, distribution and marketing of natural gas are regulated by the Natural Gas Sector Law, 5762-2002. Construction and operation of a natural gas pipeline and distribution network require a license from the Minister of Infrastructures. B. USA In the USA, oil and natural gas exploration and production rights are usually acquired from the landowners. Typically, only the oil and gas exploration and production rights are acquired, with other ownership rights in the real estate remaining with the landowner. In exchange for acquisition of exploration and production rights, the landowner usually receives current lease payments as well as royalties from the buyer if oil or gas is produced. The buyer of the rights is committed to minimal exploration operations to keep the exploration and production rights. If these commitments are not fulfilled, the landowner may sell these rights to a third party. Oil and gas exploration operations are subject to various laws, including environmental protection laws. These laws include provisions for prevention of land, water and air pollution. 1.11.25 Antitrust A. On October 11, 2000, the Antitrust Commissioner consented to a transaction in which the Israeli partners acquired the Reading & Bates rights in Yam Tethys project. This consent and its amendment were contingent on the following major conditions: 1. By a date set by the Antitrust Commissioner (as amended on a number of occasions), Delek Group (including its affiliates) will not hold, directly or indirectly, rights in the offshore oil and gas exploration projects known as Med Ashdod, Ashdod Enclave and Med Yavne (in this section: “Med Project”) or the share of Delek Group’s holding in Yam Tethys project will not exceed its holdings in Yam Tethys on August 1, 2000. In discussions held between representatives of the limited partnership and the Antitrust Commissioner, the latter confirmed that sale of the share associated with natural gas in the Med Project would be considered as compliance with the above condition. 2. There will be a separation of personnel such that information will not be exchanged relating to natural gas operations in the Yam Tethys and Med Projects (for example, the Med Yavne and Med Ashdod leases). 3. Any purchase of holdings by Delek Group (including its affiliates) of 5% or more in a corporation engaged in exploration, production, transmission, marketing or sale of natural gas in Israel, requires prior approval of the Commissioner, if the corporation has any natural gas discoveries. This sub-section (3) does not apply to the Yam Tethys joint venture.

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4. Pursuant to the directives of the Antitrust Commissioner, on October 28, 2004, Delek Drilling partnership and Ratio Oil Explorations (1992) Limited Partnership (“Ratio”) signed a sales agreement. Under the agreement, Delek Drilling partnership sold all its rights in the Med Yavne 1/8 lease (8%) and all its rights for natural gas only in the 1/9 Med Ashdod lease (21.766%). Under the agreement, the parties defined the method for continuing operations in the Med Ashdod lease, taking into account the distribution of the rights as aforesaid (inter alia, in respect of making decisions regarding the proposed work plans in the lease). In return for these rights, Ratio took upon itself the liabilities of the Delek Drilling partnership according to the existing agreements, to pay royalties from its share of the Ashdod and Yavne concession field. In addition to the royalties, Ratio undertook to pay to the Delek Drilling partnership royalties amounting to 0.625% of its share in the production from these oil concession fields (in other words, 0.1375% of the entire production of the concession). On February 7, 2005, the Antitrust Commissioner announced that there was no apparent reason to intervene in the agreement between the Delek Drilling partnership and Ratio, subject to a number of conditions, including, inter alia, that Delek Drilling partnership would waive its first right of refusal in the agreement with Ratio with regard to its participation in place of Ratio in the drilling for natural gas should Ratio be willing to relinquish its share in these drillings. Since the Ashdod Med license constitutes a direct continuation of the operations of the parties to the agreement dated October 28, 2004, Delek Drilling partnership and Ratio signed the agreement to transfer the rights (which came into effect on October 28, 2008), containing the same arrangements that were applicable to the aforesaid concession (with certain changes), to the Ashdod Med rights. Accordingly, Delek Drilling partnership transferred to Ratio its rights in the Ashdod Med license relating to natural gas only ( 22%).1 B. On August 28, 2006, the Antitrust Commissioner consented to the transfer of the partnership rights in the Matan and Michal licenses to Noble as specified in section 1.13.3A. The Antitrust Commissioner’s decision was contingent on the following major conditions: 1. The “local corporations” (as defined below) would not hold jointly, whether on their own or with additional holders, any gas rights other than those directly and exclusively arising from the Matan and/or Michal licenses, without the express prior written consent of the Commissioner. By December 31, 2006, the “local corporations” shall terminate any joint holding in gas rights, other than those directly and exclusively arising from the Matan and/or Michal licenses, which they held jointly on the decision date, whether on their own or with other holders, unless such joint holding is expressly permitted in writing by the Commissioner. 2. In any arrangement, agreement or understanding, oral or in writing, with regard to setting a mechanism or system for decision making between holders of Matan and Michal licenses for marketing natural gas produced under the Matan and Michal licenses, none of the “local corporations” shall individually own, directly or indirectly, any right or power to prevent the other holders from taking any decision or action for marketing natural gas produced under the Matan and Michal licenses. 3. The “local corporations” – Delek Group and Isramco; Delek Group – Avner Oil Exploration Limited Partnership and/or Delek Drilling Limited Partnership and/or any person affiliated with any of them; Isramco – and any affiliate. C. On January 18, 2007, the Partnership applied to the Antitrust Commissioner for a waiver of approval of a restrictive agreement by the Antitrust Tribunal. The application was filed in connection with joint exploration operations by the partnerships and Isramco in the area of 331/Ohad and 332/Shimshon licenses. In the application, the partnerships claimed that such joint exploration operations do not constitute a restrictive agreement as defined in the Antitrust Law, 5748-1988 and that the application is filed merely for the sake of caution and in view of the Antitrust Commissioner’s decision on the Matan and Michal licenses. The Antitrust Commissioner’s approval was still pending on August 2, 2007, and consequently a decision was made to separate the leases so that the full leases of the 332/Shimshon license were transferred to Isramco and the full leases in the 331/Ohad license were transferred to the partnerships.

1 The Antitrust Commissioner has not yet delivered his approval for this transfer

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1.11.26 Material agreements1 Delek Energy and/or the partnerships contracted certain material agreements which were effective in the period described in the report, as follows: A. The agreement with IEC 1. On June 25, 2002 the partners of Yam Tethys project (in this section: “the Sellers”) and Israel Electric Corporation (in this section: "IEC" or "the Buyer”) signed an agreement for delivery of natural gas to IEC. 2. The agreement is valid through July 1, 2014 or by such date as the Sellers have delivered to the Buyer a cumulative gas volume equal 18 BCM (“the Total Contracted Volume”), whichever is earlier. 3. The Buyer or the Sellers may terminate the agreement should the other party (and for the Sellers, any of them) take any bankruptcy action (as defined in the agreement) which is likely to have an adverse effect on the discharge of their obligations pursuant to the agreement, by giving at last 30 days' written notice. The Buyer and the Sellers agreed not to exercise any right they may have to lawfully terminate the agreement other than in connection with significant or continued breach of material provisions of the agreement, and only after granting a 90-day period to the party in breach to remedy such breach (unless a shorter period is stipulated in the agreement). 4. Without derogating from the Sellers’ obligations under the agreement with regard to maintaining reserves, the sellers would not be limited to any sources of natural gas (either from Israel or imported) which they supply to the buyer under the agreement. 5. The Sellers will ensure that at any time during the term of the agreement they shall have available remaining reserves in reservoirs amounting to 130% of the remaining total contracted quantity (“Remaining TCQ”) (the remaining TCQ after deduction of quantities of gas delivered by the Sellers under the agreement). The agreement has provisions for reporting on and supervision of the remaining reserves and for adjustment of certain provisions in the agreement should the sellers fail to maintain sufficient reserve balances as required. It is noted that at the date of this report, the Sellers are in compliance with the requirements of the reserve balances. 6. The agreement stipulates the annual contracted volume of gas, which changes over the term of the agreement depending, inter alia, on the pace of completion of the transmission system and its connection to IEC power stations for delivery of gas to the stations (in this section: “the Annual Contracted Volume”). 7. Under the agreement, gas is supplied on an hourly basis with a minimum and maximum volume per hour, according to procedures and mechanisms set forth in the agreement. 8. Gas is delivered to the connection point to INGL national transmission system to the permanent reception terminal on Ashdod shore. 9. Minimum bill quantity: The agreement specifies the annual minimum bill quantity, at 80% of the annual contracted volume (subject to adjustments) for which the Buyer has committed to pay even if it does not consume that volume, subject to provisions of the agreement, as well as instructions for the calculation and adjustments of the minimum bill quantity, including due to force majeure or failure to supply by the Sellers. The agreement also specifies a mechanism for the accumulation of excess volume consumed by the Buyer in the course of any year, and its use to reduce IEC's undertaking to purchase a minimum quantity, as set forth above, in subsequent years. Furthermore, the agreement specifies provisions and mechanisms allowing IEC to receive gas at no additional charge up to the volume paid for, on account of gas not consumed due to activation of the minimum bill quantity. At the date of this report, IEC consumes volumes significantly exceeding the minimum bill quantity. 10. Financial value of the agreement: Delek Energy estimates that total net receipts (net of royalties to the State and to third parties, including interested parties) of Delek Drilling partnership and Avner partnership, from the production start date for their share alone, will be $330 million and $300 million, respectively,2 based on the Partnerships’ hedging

1 For the matter of financing agreements, see section 1.13.21 above. 2 For details of delivery to IEC, see section 1.13.12A.

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agreements (see subsection 11 below) and the total quantities of gas that the Partnerships undertook to supply to IEC. Forward-looking information: The aforementioned estimate by Delek Energy is forward-looking information, based on its estimates of future gas consumption by IEC. The estimate may not materialize should actual gas consumption by IEC be different than the aforementioned projections. 11. Price of gas: The contracted price for the gas is denominated in US dollars per energy unit (BTU) and is linked to a basket of fuels and to the US Producer Price Index according to the mechanism in the agreement, including minimum and maximum prices. It is noted, in this context, that in view of the hedging agreements of the partnerships and Delek Investments as set forth in Note 27.A.7 to the financial statements, after signing the agreement with IEC, the partnerships effectively set the price for gas volumes to be sold under the agreement with IEC at $2.47 per million BTU. 12. Gas quality: According to the agreement, delivery of natural gas will comply with specifications set forth in the agreement and according to requirements of the transmission company as approved by the relevant authorities from time to time. The Buyer has the right to refuse to receive non-compliant gas until such non-compliance is remedied. All disputes between the parties with regard to gas quality may be submitted to an expert for resolution at the request of any of the parties. 13. Breach and damages: Under the agreement, should the Sellers fail to supply, at any time, the gas volume ordered by the Buyer pursuant to the agreement, and should the non-supply exceed the deviation allowed by the agreement, the Sellers shall compensate the Buyer in the subsequent month by selling gas at a discounted price up to the volume of gas not supplied in breach of provisions of the contract. Furthermore, the agreement lists specific breaches by any party for which damages are payable at high rates (including financial compensation). The agreement also sets limits to the liability of each party for breach of some of the provisions of the agreement at amounts specified in the agreement. 14. Collateral and guarantees: The agreement establishes collateral to be provided and maintained by each of the Sellers in favor of the Buyer, to guarantee the Sellers’ obligations under the contract, all at dates, terms and amounts set forth in the agreement. The shares of Delek Drilling and Avner partnerships in the collateral are $7.65 million and $6.9 million, respectively. 15. Relationships between the Sellers and the Sellers’ coordinator: The Sellers operate jointly on issues such as development of the reservoir, theSsellers’ facilities and gas production, delivery and supply pursuant to the agreement. Concurrently, the Buyer declares that none of the provisions in the agreement shall be considered as creating mutual liability among the Sellers, and each Seller is individually liable to the Buyer for its share of the oil rights and in connection with any liability arising from the agreement. Although the Buyer may order gas volumes by a single notice to the Sellers’ coordinator, the volume considered ordered from each of the Sellers will be the portion of each of the Sellers out of the total volume ordered. 16. Addendum to the agreement: On August 15, 2006, the Sellers contracted an addendum to the agreement for the supply of additional volumes of natural gas (“the Addendum to the Agreement”). Under the Addendum to the Agreement, the Sellers granted IEC an option to purchase additional volumes of natural gas, primarily in response to IEC’s gas supply requirements during peak consumption hours. This option referred to additional volumes of gas purchased after June 2006. The validity of the addendum was extended from time to time to March 31, 2009 but in practice the parties acted according to the terms of the addendum until June 30, 2009. It is noted that the purchase price for gas under the terms of the Addendum to the Agreement is significantly higher than the price at which IEC purchases natural gas under the 2002 agreement, due to the different mechanism according to which the gas price is set and due to the increase in global fuel prices. 17. Memorandum of Understanding with IEC: In July 2009, a memorandum of understanding was signed between the Yam Tethys Group partners and IEC for the supply of an additional quantity of 1 BCM of natural gas per year for five years (a total of 5 BCM). The financial scope of the agreement (for 100% of the rights) is estimated at the reporting date, to be USD 1 billion. The actual revenue of Yam Tethys Group from the sale of additional quantities to IEC will be affected by a number of conditions, mainly global fuel

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prices, supply schedule and other conditions. The parties intend signing the agreement at the aforesaid terms. Notice of forward-looking statements: The forgoing estimates concerning the agreements with the Israel Electric Corp is forward looking information, regarding which there is no certainty that it will materialize, in full or in part, in the aforesaid manner, and in particular, it is not at all certain that a binding contract will be signed under the foregoing terms and it is uncertain that the financial scope of the agreements will be as estimated above. The above estimates may not materialize, inter alia, if the specific agreement is not finally reached under the foregoing terms and if the global fuel prices or the volume of gas supply to the IEC become volatile. B. Agreement with Paz Refineries Ashdod On September 3, 2004, an agreement was signed between the Yam Tethys project partners and Paz Ashdod for supply of gas to the oil refinery in Ashdod. The total contracted volume that Yam Tethys group is required to supply to Oil Refineries Ltd. (“ORL”) is 1.3 BCM. The term of the contract is ten years from the end of the trial period specified in the contract, or until ORL consumes the total contracted volume, whichever is earlier. ORL has a take or pay agreement for a minimum annual volume of gas according to a mechanism set forth in the agreement. The total financial value of the agreement (for all Yam Tethys project partners) is estimated at $120 million. Gas supply to ORL started in November 2005. Forward-looking information: The above assessment is forward-looking information, based on Delek Energy's estimates relating to the future gas consumption of Paz Refineries Ashdod. The estimate may not materialize should actual gas consumption by Paz Refineries Ashdod be different from the aforementioned projections. C. Agreement with Delek Ashkelon In August 2005, an agreement was signed and approved between Yam Tethys project partners and IPP Delek Ashkelon Ltd. ("Delek Ashkelon”), a company controlled by Delek Group, for the supply of gas to Delek Ashkelon’s power station adjacent to the desalination plant in Ashkelon. Gas supply under the agreement will commence when natural gas is delivered to Delek Ashkelon’s power station, subject to terms set forth in the agreement, and will end after 15 years from the end of the run-in period of the power station, or on June 30, 2022. The partners in the Yam Tethys project are negotiating with Delek Ashkelon to increase the volume under the agreement. The annual gas volume to be purchased by Delek Ashkelon is 0.12 BCM. The total financial value of the agreement (for all Yam Tethys project partners) is estimated at $160 million. Actual revenues will be influenced by a number of conditions, primarily the price of fuel oil and rate of gas consumption. Gas supply to Delek Ashkelon commenced in August 2007. Delek Ashkelon has a take or pay agreement for a minimum annual volume of gas according to a mechanism set forth in the agreement. Forward-looking information: The above assessment is forward-looking information, based on Delek Energy's estimates relating to the future gas consumption of Delek Ashkelon. The estimate may not materialize should actual gas consumption by Delek Ashkelon be different from the aforementioned projections. D. Agreements for the sale of natural gas to Hadera Paper On July 29, 2005, an agreement was signed between the Yam Tethys project partners and Hadera Paper Ltd. (“Hadera Paper”) for the supply of natural gas. Gas supply under the agreement commenced in August 2007 upon completion of the pipeline and required facilities, and shall terminate on the earlier of five years from commencement of gas flow or upon purchasing of 0.43 BCM, but no later than July 1, 2011. The gas price formula specified in the agreement is based on the price of fuel oil with a discount component, including minimum and maximum prices. Hadera Paper has a take or pay agreement for a minimum annual volume of gas according to a mechanism set forth in the agreement. The total financial value of the agreement (for all Yam Tethys project partners) is estimated at $40 million. Actual revenues will be influenced by a number of conditions, primarily the price of fuel oil and rate of gas consumption.

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Forward-looking information: The above assessment is forward-looking information, based on Delek Energy's estimates relating to the future gas consumption of Hadera Paper. The estimate may not materialize should actual gas consumption by Hadera Paper be lower than the aforementioned projections. E. Agreement for the sale of natural gas to Israel Chemicals Ltd. On March 25, 2008, the Yam Tethys project partners signed a agreement with a subsidiary of Israel Chemicals Ltd. (“ICL”), guaranteed by ICL, for the supply of natural gas to plants in the ICL Group in Israel (“ICL Group”). Under the agreement, ICL Group undertook to purchase a total gas quantity of 2 BCM from Yam Tethys partnership, subject to the provisions in the agreement (“the Contract Gas Quantity”). The supply of gas will commence in December 2010 and will end at the earlier of: (1)five years from the date of completion of the running in period, but no later than September 2015 (subject to extension as described below; (2) purchase of the entire contract gas quantity. The period defined in subclause (1) will be automatically extended by another year, if by the end date, the entire contract gas quantity has not been consumed. In addition, Yam Tethys partners have an option to extend the period by an additional two years, until the entire contract gas quantity has been consumed, as set out in the agreement. The price of gas is based on the price of fuel oil, with a discount including maximum and minimum prices. ICL Group has a take or pay agreement for a minimum annual volume of gas according to a mechanism set forth in the agreement. The total financial value of the agreement (for all Yam Tethys project partners) is estimated at $260-330 million. Actual revenues will be influenced by a number of conditions, primarily the price of fuel oil and rate of gas consumption. Forward-looking information: The above assessment is forward-looking information, based on Delek Energy's estimates relating to ICL's future gas consumption. The estimate may not materialize should actual gas consumption by ICL be different from the projections. F. Letters of intent signed for supply of natural gas: 1. Memorandum of Understanding with IEC: A) On December 31, 2009, a memorandum of understanding was signed between the Israel Electric Corp (IEC) and the Tamar project partners and between the IEC and the Tethys Yam project partners. The IEC board of directors instructed the IEC management to conduct exclusivity negotiations with the objective of signing binding contracts within 6 months. The letters of intent which were signed are as follows: (1) Letter of intent for the purchase of natural gas from the Tamar project – according to the letter of intent between the Tamar project partners and IEC, the parties will conduct negotiations for the sale of minimum BCM 2.7 per year of natural gas from the Tamar project to IEC and which volume may be substantially greater, for a period of 15 years. The annual revenues from the sale of gas to IEC as aforesaid, is estimated to be around USD 400 to 700 million (regarding 100% of the rights in the Tamar project). It is clarified that the actual revenue will derive, inter alia, from the global fuel prices at the time of actual supply and from the volume of gas that will be purchased in practice by IEC. It is noted that the Tamar project operator (Noble) estimates the revenue from the sale of the total quantity of gas to IEC, under the foregoing letter of credit, to be USD 9.5 billion (regarding 100% of the rights), and this is based on its assessment regarding the volume and prices of gas that will be sold throughout the contract period, calculated primarily according to estimates of the projected fuel prices during the contract period. (2) Letter of intent to purchase gas and storage services - under another letter of intent signed by IEC and the partners in the Yam Tethys project, IEC will negotiate with the Yam Tethys project partners for the acquisition of strategic inventory of natural gas and the acquisition of pumping, storage and extraction service for the gas purchased from the Mari field. Notice regarding forward-looking information: The forgoing estimates concerning the agreements with the Israel Electric Corp constitutes forward

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looking information, regarding which there is no certainty that it will materialize, in full or in part, in the aforesaid manner, and in particular, it is not at all certain that a binding contract will be signed under the foregoing terms or under different terms, and it is uncertain that the volume supplied and the financial scope of the agreements will be as estimated above. The foregoing estimates may not materialize, inter alia, if binding contracts are not signed or if they re signed under different terms to those stated above, or if the global fuel prices or the volume of gas purchased by the IEC under the supply contract, if it will be signed, will become volatile or if any of the risk factors connected to the development of the Tamar project will materialize (lack of means for development and production, manifestation of technological risks, regulatory changes, an more). B) Concurrently, a letter of intent was signed between the Yam Tethys project partners and the Tamar project partners according to which the strategic inventory noted under section (1)B above will be supplied by the Tamar project, subject to the agreement of the partners in both projects. 2. Letter of intent with Dalia Power Energies Ltd. ("Dalia") On Decembrt 14, 2009 a letter of intent was signed between Dalia Power Energies Ltd. ("Dalia") and the Tamar project partners, according to which Dalia would purchase natural gas from the Tamar project for the purpose of operating the power station that Dalia will be establishing ("the Power Station"). According to the letter of intent, Dalia is expected to purchase an estimated total minimum volume of natural gas of BCM 5.6 for a period of 17 years, from the date on which operation of the power station commences, which is expected to be during the latter half of 2013. According to the letter of intent, the volume of gas that Dalia is permitted to purchase and which will be fixed according to the operating hours of the power station that will be established, its final gas consumption and size, may be smaller (in an insignificant amount) or alternatively larger (in a significant amount of up to three and a half times the quantity specified above). The revenue from the sale of 5.6 BCM of gas as aforesaid is currently estimated by the Tamar project partners to be at least USD 1 billion (regarding 100% of the Tamar project rights). It is noted that the actual revenue will derive from a range of factors, including those mentioned above, fuel and energy prices and others. The letter of intent is nonbinding and the parties intend conducting exclusivity negotiations for the purpose of signed a binding supply contract in the months following the signing of the aforesaid letter of intent. It is clarified that the agreement will be subject to Dalia establishing and operating the power station, which depends on a series of factors including receipt of statutory permits, attaining the required financing, agreements with suppliers of equipment and the construction and others. Forward looking information: The forgoing estimates concerning the agreements with Dalia constitute forward looking information regarding which there is no certainty that it will materialize, in full or in part, in the aforesaid manner, and may materialize in a substantially different manner, in particular (1) it is not at all certain that a binding contract will be signed under said terms or under other terms, and the signing as aforesaid is subject, inter alia, to agreement between the parties of the terms of the binding contract and receipt of approval from the certified authorities and required permits under any law, if required; (2) also, following signing of a binding contract, there is no certainty concerning the actual supply of gas and there is not certainty that the volume of supply and/or the scope of revenues will be as estimated above, and these are dependent upon, inter alia, the terms of the supply contract, the size and scope of the operations of the power station, its operating hours and gas consumption, and fuel and energy prices and others.

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3. Letter of intent with South Power Plant Ltd and D.S.I. Dimona Silica Industries Ltd. On February 19, 2010, a letter of intent was signed between South Power Plant Ltd and D.S.I. Dimona Silica Industries Ltd. ("the Buyers")1 and the Tamar project partners, according to which the Buyers will purchase natural gas from the Tamar Project for the purpose of operating a power station that the Buyers will establish ("the Power Plant") and for the needs of the Buyers plant in the south. According to the letter of intent, the Buyers may purchase a minimum quantity of natural gas of BCM 2.8, for a period of 17 years. Furthermore, the parties agreed in the letter of intent to terms for the purchase of additional amounts of natural gas by the Buyers for other potential projects of the Buyers ("the Additional Projects"). According to the letter of intent, the quantity of gas that the Buyers are permitted to purchase, and which will be fixed in practice, inter alia, are based on the scope of the additional projects that will be established in practice, on the operating hours of the of the power plant, the gas consumption of the power plant and the other projects, and may be greater (substantially greater, by more than double the quantities specified above). The revenue from the sale of 2.8 BCM of gas as aforesaid is currently estimated by the Tamar project partners to be at least USD 0.5 billion (regarding 100% of the Tamar project rights). It is noted that the actual revenue will derive from a range of factors, including those mentioned above, energy prices and others. The letter of intent is nonbinding and the parties intend conducting exclusivity negotiations for the purpose of signed a binding supply contract in the forthcoming months. Forward looking information: The forgoing estimates concerning the agreements with Dimona Silica constitute forward looking information as defined in the Securities Law, regarding which there is no certainty that it will materialize, in full or in part, in the aforesaid manner, and may materialize in a substantially different manner, in particular (1) it is not at all certain that a binding contract will be signed under said terms or under other terms, and the signing as aforesaid is subject, inter alia, to agreement between the parties of the terms of the binding contract and receipt of approval from the certified authorities and required permits under any law, if required; (2) also, following signing of a binding contract, there is no certainty concerning the actual supply of gas and there is not certainty that the volume of supply and/or the scope of revenues will be as estimated above, and these are dependent upon, inter alia, the terms of the supply contract, the size and scope of the operations of the power station, its operating hours and gas consumption, and energy prices and others. G. Operating agreement for Yam Tethys project (see section 1.13.2). H. Financing agreement for Yam Tethys project (see section 1.13.21). I. Agreements for payment of royalties Royalties received from Delek Drilling partnership Delek Energy and Delek Israel (in this sub-section: "the Transferors") and the general partner of Delek Drilling partnership, on behalf of the Partnership, signed an agreement for the transfer of rights in 1993. On March 30, 2000, the right of Delek Israel was transferred to Delek Investments as part of reorganization in Delek Group. J. Under the agreement, the Transferors transferred the rights in a number of licenses to Delek Drilling partnership (in this sub-section: “the Transferred Rights”) and Delek Drilling partnership undertook to pay the royalties to the Transferors, at rates set forth below, out of the Delek Drilling partnership’s share of oil, gas or any other material of value produced and used from the oil assets in which Delek Drilling partnership has or will have an interest (before deduction of any royalties, but after deduction of oil used for production). The royalty rates are as follows: until such date as the investment of Delek Drilling partnership is recouped, royalties

1 The Buyers are DSI Dimona Silica Industries Ltd., a private company incorporated in Israel and which is planning to establish a plant for manufacturing silica in Dimona and South Power Plant Ltd, a private company incorporated in Israel and which is planning to establish a cogeneration plant for producing 120MW of electricity at the plant.

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will be paid at a rate of 5% of onshore oil assets and 3% of offshore oil assets. After that date – 15% of onshore oil assets and 13% of offshore oil assets. K. Pursuant to the agreement between Delek Drilling partnership and the Transferors, in 2002 an expert was appointed to determine the meanings of certain definitions and terms relating to royalties owed by Delek Drilling as aforesaid, and mainly relating to the definition of “the investment return date". The appointed arbitrator gave his opinion, inter alia, on the calculation method and different elements that should be considered when determining the investment return date. The investment return date, after which 13% royalties are paid, came into effect at the beginning of October 2007. L. Joint operating agreement in the Matan and Michal licenses. (See section 1.13.3A). M. Delek Drilling and Avner limited partnership agreements: As general partners, Delek Drilling Management (1993), Ltd., and Avner Oil and Gas Ltd. are party to the Limited Partnership agreements of Delek Drilling partnership and Avner partnership (as the case may be). Most of the provisions in the Limited Partnership agreements of Delek Drilling and of Avner are essentially similar. Below is a summary of the main provisions of the above agreements (in this section: “the Limited Partnership Agreement”): 1. The Limited Partnership Agreement was signed between the general partner and the limited partner (and trustee). 2. The goals of the Partnerships are to participate in oil and/or gas exploration geographical regions specified in the limited partnership agreement. 3. The main expenses of the Partnerships will be "exploration and development expenses" as defined in the Income Tax (Rules for tax calculation on holding and sale of participation units in an oil exploration partnership) Regulations, 5748-1988. 4. The general partner of each Partnership is entitled to 0.01% of revenues and is liable for 0.01% of expenses and losses of the Liimited Partnership, as well as for expenses and losses of the Limited Partnership for which the limited partner may not be liable, due to restrictions pertaining to the limited partner. 5. Under the Limited Partnership Agreement, the general partner will manage all of the Limited Partnership's affairs at its discretion and to the best of its ability, and shall endeavor to implement the goals of the Limited Partnership as set forth in the Limited Partnership Agreement. A supervisor is appointed to each Partnership and given certain specific supervisory authority intended to protect the interests of holders of participation units. The general partner is entitled to monthly management fees of $40,000 and to reimbursement of certain direct expenses allowed under the Limited Partnership Agreement. 6. The Limited Partnership Agreement stipulates that all of the Limited Partnership’s profits, which can lawfully be distributed by the Partnership as profits after deduction of amounts (excluded in determining the profit) required by the Partnership – will be distributed to the partners pro rata to their rights, as set forth in the Limited Partnership Agreement. 7. The general partner and/or employees and/or management shall not be liable to the Limited Partnership nor to the limited partner for any act of commission or omission made on behalf of the Limited Partnership under authority granted to the general partner within or pursuant to the agreement or by law, unless the acts were committed fraudulently or wilfully or constitute gross negligence. The Limited Partnership Agreement also includes provisions for insurance and indemnification of the general partner. 8. The Limited Partnership remains in effect as long as the Limited Partnership owns, directly or indirectly, a valid oil asset or rights therein or in any oil or gas to be produced. It will be terminated before the specified dates if it is disbanded earlier pursuant to the Limited Partnership Agreement or by law or by the partners' consent. It is noted that the Limited Partnership Agreement of Avner partnership stipulates that the general partner may serve as operator of oil exploration operations in areas where the Limited Partnership has interests, and will be eligible to be appointed operator in areas where it may have interests in the future. Furthermore, the Limited Partnership Agreement of Avner partnership specifies the right to royalties at 6% of the entire share of Avner partnership in oil and/or gas and/or any other material of value produced and exploited from oil assets where Avner partnership has, or may

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have in the future, an interest (before deduction of any royalties, but after deduction of oil used for production). Delek Investments is eligible to 1% of the aforementioned 6%. 1.11.27 Legal proceedings A. In the matter of the claim filed at the Tel Aviv District Court against Yam Tethys Ltd. and a number of other defendants, see Note 31.A.13 to the financial statements. 1.11.28 Business strategy and objectives Oil and natural gas exploration includes high-risk investments. As such, companies operating in this sector are required, inter alia, to diversify and balance their assets so as to realize the potential while taking calculated risks. Accordingly, Delek Energy’s portfolio includes productive oil and gas assets with further potential for low-risk development and exploration (Yam Tethys, Elk, and AriesOne), oil and gas assets in pre-development stages and in development stages that are expected to produce oil and natural gas in the next few years (Tamar, Vietnam and Matra), and exploration projects, which if successful, could have a significant contribution to the increase in Delek Energy’s value (exploration operations in oil assets off the shores of Israel). Delek Energy estimates that the commercial discovery of gas at Tamar 1, continuation of successful operation in the Yam Tethys project and the attractive exploration assets off the shores of Israel, position the assets in Israel as the core assets of the company, which also incorporate the greatest potential for growth and generation of value. In view of the aforesaid, Delek Energy’s short-term operating strategy and objectives are as follows: A. Delek Energy (through Delek Drilling and Avner partnerships) will operate to maintain and reinforce its leadership in Israel and its professional capacity in the oil and gas sector, including: 1. Yam Tethys project: A) Agreements for the sale of all the gas reserves discovered in the project. B) Completion of project development and maintenance of the gas production capacity from it with the aim of it being used also as a bridge for the supply of gas to Tamar project customers, until the development of the latter is complete. C) Examination of the possible future uses of the facilities at the project and the Mari reservoir, including for the purpose of selling strategic storage and operational services for gas to consumers in Israel and for unloading and storage of LNG for the State of Israel. D) Using available cash flows from the sale of gas to receive additional financing for the partnership's expected investments. 2. Tamar project: A) Developing the Tamar project, including drafting a final development plan and purchasing of equipment and services, with the aim to enabling commencement of the supply of natural gas in 2012. B) Negotiations and agreements for the sale of natural gas to potential consumers in Israel C) Raising (non recourse) interim capital from foreign banks and replacing it later with (non recourse) project related financing, for the partnerships in order to finance its share in the development plan costs. 3. Continuing the partnerships' exploration effects in the offshore oil rights areas opposite the cost of Israel, including processing and analysis of 3D seismic surveys, focusing on the oil licenses with the greatest potential and examining exploration drillings in 2010- 2011, if the foregoing surveys will produce positive results. B. Delek Energy will continue its operations in the USA through the managerial and professional infrastructure of Elk, while drafting operating strategies with respect to this operation. Elk will also take steps to assess and take advantage of business opportunities in its field of operation in the USA, assess options for the sale of assets that are not defined as core assets in its operations and establish collaborations with others.

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C. Delek Energy intends to continue to provide financial and management support in projects and companies, which are not defined as the core assets of Delek Energy, to allow them to continue their operations with the objective of maintaining the present situation. Concurrently, Delek Energy will assess the options for the sale of assets which are not core assest at an appropriate price, taking into account the global economic situation and prices of oil and natural gas. D. The investments required for Delek Energy's operations require substantial funds.Delek Energy intends raising the funds by using the expected proceeds from the distribution of the partnerships' profits and the surplus cash flows in the subsidiaries and to take steps to raise finances by possible issuing of capital and/or debentures in Israel, through bank financing on the company level and/or the project level and by assessing the option of selling assets that are not the core assets of Delek Energy. It is noted that it is uncertain whether Delek Energy will succeed in its efforts to raise these financial means. The objectives and strategy of Delek Energy, as described above, are general intentions and goals, and as such, there is no certainty that they will be realized, inter alia, due to changes in the various projects, including the Tamar project, changes in the market situation, changes in priorities resulting from the results of surveys that will be conducted and due to unexpected events and the risk factors described in section 1.13.30 below. 1.11.29 Insurance coverage Delek Energy has control of well insurance for all drilling projects in which it is involved, as is common practice in this sector, as well as liability insurance for damage to third parties and/or employees. In addition, Delek Energy holds directors liability insurance under a policy acquired by Delek Group for the companies in the Group. Delek Energy estimates that the abovementioned insurance coverage is reasonable. 1.11.30 Risk factors Oil and gas exploration and the development of oil and gas discoveries involve large financial outlays with a high financial risk, primarily for reasons set forth below. This is even more significant for offshore oil exploration and production. A. Fluctuations in the dollar exchange rate: Delek Energy is exposed to fluctuations in the dollar exchange rate. The international operations of Delek Energy are generally denominated in US dollars. From January 1, 2008, the limited partnerships also measure their results in US dollars, therefore every erosion in the dollar-shekel exchange rate will lower the revenue, net expenses and assets of Delek Energy, and consequently, will lead to a decrease in the equity and profitability of the company. On the other hand, in 2007 the Company started to raise dollar loans, which at the date of the report represent 14% of the total liabilities in the consolidated balance sheet. Therefore, every revaluation in the shekel-dollar exchange rate will result in revenue from exchange rate differences due to these loans. B. Dependence on global oil prices: The prices paid by consumers for natural gas in reservoirs in which the partnerships are party, are derived, inter alia, from prices of alternative energy sources, such as oil and coal. A decrease in prices of alternative fuels could have an adverse impact on the price which Delek Energy is able to obtain from its customers for natural gas sold by the partnerships and/or may influence the viability of production from the reservoirs discovered in the project and newly discovered reservoirs (if any) by the partnerships. Furthermore, significant fluctuations in coal prices may lead to a change in the usage model of IEC, such that it will give preference to its coal-operating power stations compared with its natural gas -operating power stations, and vise versa. Oil and gas prices have a direct impact on Delek Energy’s income from sales of oil and gas in its overseas projects. Furthermore, assessments of reserves are also affected by oil and gas prices, for example, a decrease in oil and gas prices could result in a depletion of economically-viable production from reserves in Delek Energy’s oil and gas reservoirs, while an increase in oil prices could result in an increase in production from economically-viable reservoirs. C. Competition for gas supply: To the best of Delek Energy’s knowledge, at the reporting date there are three major competitors for gas supply in the Israeli market (see section 1.13.15 above). In view of the relatively small gas market in Israel, competition could push down prices and consequently affect the ability of the limited partnerships to market the gas reserves they discovered or could discover. In the Vietnam project as well, if a potential commercial quantity

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of natural gas is discovered, Delek Energy could be required to compete with other gas suppliers for supply of gas to local markets in Vietnam. D. Uncertainty regarding the construction of the national gas pipeline: The ability of the Yam Tethys project partners to sell their gas to other potential consumers and to increase the gas volume supplied to IEC is dependent, inter alia, on the construction of the national gas pipeline. At the date of this report, there is still uncertainty with regard to the completion date of this system. E. Absence of insurance cover: Although Delek Energy is insured against possible damages with regard to projects in which it operates, these policies do not cover all potential risks and therefore the insurance payout may not cover all potential losses. (in the Yam Tethys project – in the matter of both potential loss of income and establishment costs of the production system in the case of an event that causes damage to the production system) Furthermore, there is no certainty that appropriate policies may be purchased in the future under reasonable commercial terms, if at all. F. Operational risks: Oil and gas exploration and production operations are exposed to all risks involved in exploration and production of oil and gas, such as uncontrolled gushing from the well, explosion, collapse and conflagration of the well. Any of these could damage or destroy the oil or gas wells, production facilities, exploration equipment as well as cause bodily injury and damage to property. There is also a risk that equipment could be trapped in the oil drill, preventing the continuation of drilling operations or incurring significant expenses. Should any of these events occur at sea, consequences could be extremely severe and major damage could be incurred. Furthermore, there is risk of liability for pollution damage due to gushing and/or leaking of oil and/or gas. There is no certainty that all required insurance to cover these risks can be obtained, nor that coverage provided by the insurance policies obtained will be sufficient. It is noted that the decision on the type and scope of insurance policy is usually made separately for each drilling, taking into account, inter alia, the cost of insurance, nature and scope of the proposed coverage and the anticipated risks. The operator of a specific project could decide not to take out certain policies. G. Dependence on contractors, equipment and professional services: There are no contractors in Israel involved in drillings or offshore seismic surveys of the type conducted by the limited partnerships. Therefore, the partnerships are required to contract with foreign contractors for the necessary services. Furthermore, there are few rigs and other vessels capable of drilling at sea in general, and in deep water in particular, compared to the large demand, and there is no certainty that proper vessels will be available for drilling when required. Not all the suitable equipment and human resources for specific operations in the oil exploration process are available in Israel or can be ordered on short notice, therefore it is often necessary to order equipment and professional human resource services from abroad, which is expensive and causes significant delay in operations. Contracting with foreign contractors for offshore oil exploration, development and production operations (including maintenance and reworking contractors) could sometimes be difficult due to the security and political situation in Israel. H. Exploration risks and reliance on incomplete data and assumptions: Oil and gas exploration is not an exact science, therefore there is a high risk, since failed exploration could result in a loss of investment. The geological and geophysical means and techniques do not provide an accurate forecast as to the location, shape, features or size of oil or gas reservoirs. Therefore, determining exploration prospects and estimating the size of existing reservoirs and gas reserves could be based, to a large extent, on partial or approximate data and on unproved assumptions. It is obviously impossible to ensure that oil or gas will be found at all as a result of exploration operations, or that it will be commercially viable for production and exploitation. Furthermore, there is shortage of direct geological and geophysical information for some of the offshore areas of the oil assets of the partnerships and the Company. This is due, inter alia, to the limited number of drillings in these areas and the sparse information that could be derived from them. Estimates of proved gas reserves in the reservoir could also change from time to time. Estimates of proved gas reserves in the reservoir could also change from time to time. The estimated oil and gas quantities in producing reservoirs during the reporting period is calculated each year, inter alia, based on assessments of oil and gas reserves by external experts. The estimation of proved and developed gas reserves according to the aforementioned principles is subjective, based on different assumptions and incomplete information, and the estimates of experts could vary significantly. There are numerous assumptions and data that affect the results of the estimated reserves and changes in these assumptions and/or data could result in significant changes in the assessments. The information in this report regarding the proved and probable reserves in the different reservoirs is based on assessment only and should not be

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considered as information regarding precise quantities. Estimates of the proved and developed gas reserves in the Mari gas field are used to determine the depreciation rate of assets in financial statements of the limited partnerships. In Israel, depreciation of investments associated with discovery and production of proved and developed gas reserves is based on the depletion method, in other words, in each accounting period the assets are depreciated at a rate determined by the number of units of gas actually produced, divided by the proved and developed gas reserves remaining according to estimates. Given the fundamental importance of the depreciation, the abovementioned changes could significantly affect the operating results and financial situation of the limited partnerships and of Delek Energy. I. Estimated costs and schedules and potential shortage of means: Estimated costs and estimated schedules for exploration are based on general forecasts only and there could be significant variances. Exploration plans could change significantly due to the findings of these explorations, causing significant deviations in schedules and estimated costs of these operations. Malfunctions during exploration and production, and other factors, could extend the operations far beyond schedule and expenses for completing exploration could be significantly higher than forecasted. Proposed exploration operations could also involve financial outlay, which the limited partnerships may not be able to cover. According to JOAs, late payment of the share of Delek Energy or the limited partnerships, as relevant, of an approved budget for a work plan is a breach which could lead to forfeiture of rights in the oil asset or assets to which the operating agreement applies. Each party to the JOA is liable for timely payment of its relative share. Should other parties to the agreement fail to pay the amounts due and are in breach of the agreement, Delek Energy could be liable for payments significantly exceeding its proportional share in the oil asset or assets relative to the breach. If such payments are not made on time, the company could risk forfeiture of all its rights in the assets. Particularly high costs of offshore drilling and development could result in expected or unexpected deviations in the budget. This could prevent Delek Energy from fulfilling its financial obligations, resulting in forfeiture of its rights. J. Development of a field in the event of a discovery: The decision-making process for continued investment in development and commercial production, intermediate operations prior to commercial production, and implementation of development and commercial production (if feasible) could continue for a long period and involve heavy expenses. Production in very deep waters (such as the depth in the Tamar discovery) is extremely complicated and requires technology for construction of special production platforms. K. Dependence on permits from external entities: Operations of some of the limited partnerships’ areas requires different permits. To the best of Delek Energy’s knowledge, the main permits required in Israel are those pursuant to the Petroleum Law and Natural Gas Sector Law, permits from the security forces, Israel Nature and Parks Authority, Civil Aviation Authority, local authority and/or planning and construction committees, the Ministry of Agriculture and Rural Development – Aquaculture Department, Ports Authority and shipping department in the Ministry of Transportation. Exploration and production abroad also require permits from authorities in the host countries. Attaining these permits could entail additional expenses beyond the budgets allocated for such operations, or cause delays to schedule of planned operations. Notwithstanding the aforesaid, some of the limited partnerships’ operations are subject to coordination and scheduling with Israeli security forces. Dependence on security forces could disrupt plans of the partnerships with regard to such operations, both in terms of their ability to carry out planned activities and in terms of the schedule and costs of these operations. L. Regulatory changes: Delek Energy’s operations in Israel require numerous regulatory permits, primarily from the competent authorities pursuant to the Petroleum Law and Natural Gas Sector Law, as well as permits from state institutions (including the Ministry of Defense, Ministry of the Environment and planning authorities). In recent years, a number of bills were presented for amendments to the relevant laws and regulations in the field of operations of Delek Energy and its partnerships. These regulatory changes could have an adverse effect on the operations of the partnerships. In Delek Energy’s operations in the world, primarily in undeveloped countries, there is a risk that changes in regulations could have an adverse effect on the company. M. Dependence on weather and sea conditions: Rough seas and difficult weather could delay schedules of offshore work plans and extend the time for their completion. These delays could increase expected costs and could also cause non-compliance with mandatory schedules undertaken by Delek Energy.

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N. Tax risks: The tax issues related to operations of the limited partnerships have yet to be litigated in Israeli courts and it is impossible to determine or to anticipate how the courts will rule on such issues, if and when they are brought before them. Furthermore, for some of the legal issues there is no way to anticipate the position of the tax authorities. O. Financing liabilities: A significant part of Delek Energy’s operations were financed by loans from Delek Investments and from banks in Israel and other countries. If such loans are not extended, it could be difficult to raise the funds required for their repayment. Since the partnership operations are subject to special tax regime that includes tax benefits, for changes resulting from regulatory changes or changes in the position of the tax authorities. The foregoing may have material impact on the tax regime applicable to the partnerships. The limited partnerships have financing agreements as set forth in section 1.13.21 above. According to these financing agreements, the limited partnerships have placed liens, inter alia, on their rights in the Ashkelon lease, agreement with IEC, hedging agreement for determining the price of gas based on an agreement with IEC, the Yam Tethys project JOA, facilities and rights according to insurance policies. Should the limited partnerships fail to comply with their liabilities under the aforementioned financing agreements, this could lead to a demand for immediate repayment of amounts due under the financing agreements, as well as to liquidation of the collateral provided by the limited partnerships. P. Dependence on a major customer: The limited partnerships have an agreement with IEC for the sale of natural gas. IEC is currently the largest single consumer in Israel and the partnerships’ main consumer of gas. Payments received from IEC under the IEC agreement are currently the main source of revenue for the limited partnerships. Failure of IEC to comply with its undertakings for timely payment of the amounts payable under the agreement with IEC could lead to a breach of the financing agreements and consequently to demands for their immediate repayment. Moreover, to the best of Delek Energy's knowledge, IEC's license expires in 2010. It is impossible to anticipate the changes to IEC's operating license (if extended), nor how these changes would affect the financial status of IEC. It is noted that the government's policy to increase competition in Israel's energy market by introducing private power producers, as well as the government's intention to privatize IEC, could adversely affect IEC’s financial robustness, thus affecting its ability to meet its liabilities under the agreement. The agreement with IEC has several provisions relating to force majeure events, which, should they occur, would release IEC from its obligations to continue making payments under the agreement. Q. Dependence on operators: Delek Energy relies to a large extent on operators in the projects in which it is involved, including the Yam Tethys project, Michal and Matan licenses, and the Vietnam, North Sea and Guinea-Bissau projects, also due to the experience of these operators and Delek Energy’s relative lack of experience. R. Arrears for payments for joint operations: According to agreements with the other partners in the oil assets, any party that does not pay its debts in full, under the agreements, shall forfeit their rights in oil assets to which the agreement applies, without any compensation. S. Minority decisive vote: In part of the transactions that Delek Energy is party to, its participation holdings are low, and subsequently, its voting rights as well. Since the decisions are taken by majority vote (by majority as defined in the JOAs), Delek Energy has no influence over the decisions that are made. In addition, in these transactions, if one of the partners withdraws and the other partners do not take accept its share (of expenses pending approval) in exploration operations, exploration operations might be terminated before completion of the plan defined in the transaction and the oil assets in which exploration operations are performed might be returned. T. Shortage of production and development resources and participation in operations: Commercial discoveries and their production require Delek Energy to invest significant amounts, which exceed the means currently available to it. These costs, especially with regard to offshore discoveries (such as Tamar), are extremely high and the operations also entail risks, including operational risks. Although Delek Energy could hold a valuable asset if there is a commercial discovery, there is no certainty that collateralizing this asset would be sufficient to obtain credit for its development and production. It is noted that because of the royalties due by the limited partnerships to the State, Delek Energy (Delek Drilling partnership) and others, there is no certainty that, in the event of a commercial discovery, development of the oil field and oil production would be financially viable for the limited partnerships. A sharp rise in production expenses or a sharp drop in oil prices could have an adverse effect on production feasibility.

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U. Inclusion of additional participants and dilution of the share of the partnerships in revenue: Exploration and production operations require substantial capital which in many cases cannot be raised within the frame of loans or debt, therefore in certain cases it may be necessary to include additional partners in the rights of the various Delek Energy assets, leading to dilution of Delek Energy's share in those assets and in any revenue deriving from them. V. Cancellation or expiration of oil rights and assets: Oil rights are granted for a limited term, and are contingent on fulfilling commitments on dates specified in terms of the oil assets Non- compliance with the commitments could lead to cancellation of the oil rights. An extension of the oil right is at the discretion of competent authorities in the relevant country, which may refuse an extension, restrict the oil right or add other conditions. The ability to exploit oil assets depends, inter alia, on financing of various operations and the availability of suitable equipment and personnel. The absence of equipment or personnel could increase the costs or even prevent fulfillment of the terms of the oil rights, prevent or restrict the extension of rights to assets or cause them to expire. Failure to meet the terms stipulated in the oil rights could result in a loss of the rights and loss of investment. W. Migrating reservoirs: Oil or natural gas reservoirs that are discovered or will be discovered in the areas in which Delek Energy or the limited partnership have rights could migrate (in terms of the geological formation and size of the reservoir) into other areas where these companies have no rights, and vice versa. If gas migrates to areas in which other parties have rights, negotiations could be required for an agreement on joint exploitation and production from the reservoir, to achieve maximum efficiency of the oil or natural gas reserves. X. Security and geo-political risk: Delek Energy’s exploration operations in Israel and abroad are often conducted in remote locations (at sea) and/or in countries where the political regime is unstable. The limited partnership is exposed to security risks, including terrorism, primarily in the area where Yam Tethys facilities are located, in relative proximity to Israel’s border with the Gaza Strip. The exposure to geo-political risks in countries in which Delek Energy operates could have an adverse effect on the company in the event of war, coup d'état or financial crisis. Y. Affiliation with the Delek Group and its controlling shareholder, Mr. Yitzhak Tshuva: the company belonging to Delek Group and its controlling shareholder, Mr. Yitzhak Tshuva affects its ability to obtain credit, inter alia, due to single borrower group restrictions, the result of which the Company's banking credit sources may be limited, and other regulatory restrictions imposed on the banking system and institutional organizations by the Ministry of Finance and the Bank of Israel. The table below presents a summary of risk factors by type (macro risks, sector-specific risks and company-specific risks), according to the estimates of Delek Energy based on the degree of their effect on the company: major, moderate or minor effect.

Impact of risk factors on Delek Energy’s business Major Moderate Minor Macro risks Fluctuations in the dollar exchange rate X Dependence on global oil prices X Sector-specific risks Competition for gas supply X Uncertainty regarding construction of the national X gas pipeline Insurance X Operational risks X Dependence on contractors X Exploration risks X Estimated schedules and costs X Field development on discovery X Dependence on permits from external entities X

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Impact of risk factors on Delek Energy’s business Major Moderate Minor Regulatory changes X Dependence on weather and sea conditions X Company-specific risks for Delek Energy Tax risks X Financing liabilities X Dependence on primary customer X Dependence on operator X Arrears in payments for joint operations X Minority decisive vote: X Shortage of production and development resources X and participation in operation Cancellation or expiration of oil rights and assets X Inclusion of additional participants X Migrating reservoirs X Security and geo-political risks X Belonging to Delek Group and its controlling X shareholder, Mr. Yitzhak Tshuva

The impact of these risk factors on the energy sector is based on estimates alone and may actually differ.

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Glossary

Evaporites: Sediment formed by evaporation of water containing primarily salt or gypsum Levantine Basin: The geological basin in the eastern the Mediterranean Exploration: Operations related to the search for oil and gas LNG – Liquid Natural Gas Hydrocarbons: Carbons, a generic name for oil and gas, which are coal and hydrogen compound Preliminary permit: As defined in the Petroleum Law The Commissioner, or the Petroleum Commissioner: The Commissioner of Petroleum Affairs appointed under the Petroleum Law, 5712-1952 Working interest: An interest in an oil asset granting its owner the right to participate, pro rata, in the exploration, development and production of oil, subject to payment of a corresponding percentage of the expenses arising from these works, after acquiring the working interest Oil right: A license or lease, as defined in the Petroleum Law Priority rights to obtain a license: As defined in the Petroleum Law The Petroleum Law: The Petroleum Law, 5712-1952 The Natural Gas Sector Law: The Natural Gas Sector Law, 5762-2002 Ownership: As defined in the Petroleum Law Oil exploration: (1) Test drilling (2) Any other operation for oil exploration, including geological, geophysical and geochemical tests, and drilling to achieve geological information only. Commercial volumes: A volume of oil, sufficient for production on a commercial basis Log: Electric logs carried out during the drilling for continued recording of rock properties and content, to locate the potential layers that could contain oil or gas reserves Oil asset: Oil rights, preliminary permits, priority rights to obtain a license, permits, grants, oil exploration and/or production rights in a certain area and other rights conferring rights to oil that was discovered or will be produced in a certain area Oil: Any petroleum fluid, whether liquid or gaseous and includes oil, natural gas, natural gasoline, condensates and (carbons) hydrocarbons and also asphalt and other solid petroleum hydrocarbons when dissolved in and producible with fluid petroleum Seismic survey: A method that allows (on land or offshore) subterranean imaging and detection of geological formations. The survey is carried out by inserting subterranean seismic waves and returning them from the different aspects in the tested profile. 2D and 3D surveys are common today. The 2D surveys are mainly used to obtain preliminary underground information in the survey area, and for general detection of formations that could serve as oil traps. The 3D surveys are carried out in areas detected as having potential in the 2D surveys. These surveys are more expensive than the 2D surveys and produce higher-quality results. The image received is detailed and allows, inter alia, detection of the optimal location for drilling and a more accurate assessment of the size of the formation. Development: Drilling and equipping of the oil asset area to determine its production capacity and for oil production and marketing Test drilling: Drilling of test wells to find oil or to determine the size or edges of the oil field Horizontal drilling: Drilling of a well that travels horizontally through a producing layer Confirmation well: A drilling to confirm the existence of the oil reservoir that was discovered in the discovery drilling, and verification of the production tests in the discovery drilling. Directional drilling: Diagonal drilling towards the target layer, compared to regular vertical drilling Appraisal well: A drilling carried out as part of the appraisal drilling plan, to determine the physical size, oil or gas reserves and the production rate of the field

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Reserves: Amounts of recoverable oil and/or gas in a reservoir Proved reserves: Oil or gas reserves that to a high level of certainty are recoverable, according to the regulations of the Securities and Exchange Commission (SEC) and the regulations of the Society of Petroleum Engineers and World Petroleum Council (SPE/WPC) Proved, developed and producing reserves (PDP): Proved reserves produced by development and production drilling Proved, developed and non-producing reserves (PDNP): Proved reserves in reservoirs in a producing field, where commercial production has not commenced. There are development and production drillings in other reservoirs in the same field, however these reserves are in reservoirs that are closed behind pipe. As the yield in producing reservoirs declines, the closed behind pipe reservoirs will decline. Proved, undeveloped reserves (PUD): Proved reserves in reservoirs, where there is no development drilling in continuation of or adjacent to the reservoirs with proved, developed and producing reserves Probable reserves: Reserves believed to exist with reasonable certainty based on reasonable evidence of the presence of recoverable hydrocarbons in a known formation or reservoir, or based on assumptions regarding contact between fluids (water and oil), with a lower probability than that of proved reserves deriving from lower supervision of the wells in the area and/or lack of production tests. These reserves could include laterals of proved reservoirs or other reservoirs where no production tests have been carried out at a commercial rate or recoverable reserves using methods to increase production not yet assessed at the reservoir or at reservoirs where the implementation of the plan is uncertain. License: As defined in the Petroleum Law Oil field: Land with geological layers under which an oil reservoir lies with potential for commercial production. Jurassic layer: Rocks from a geological period dating from about 144 million to 208 million years ago Triassic layer: Rocks from a geological period dated from about 208 million to 245 million years ago Tertiary layer: Rocks from a geological period dating from about 66 to 1.5 million years ago Pliocene layer: Rocks from a geological period dating from about 5 to 1.5 million years ago Mesozoic layer: Rocks from a geological period dating from about 66 million to 245 million years ago Discovery: Discovery of oil in a drilling Ra'af formation: a group of rock strata, primarily limestone, dating from the later Triassic period Gvanim formation: a group of rock strata, primarily tertiary and sandy dating from the middle Triassic period and found above the Ra'af formation BCF: Billion cubic feet, which is 0.001 TCF or 0.0283 BCM BCM: Billions of cubic meters, which is 35.3 BCF or 0.0353 TCF BOE: Barrel of oil equivalent – the amount of energy produced from gas that is the same as the amount of oil produced from one barrel of oil BOEPD: BOE per day Mmcf/D: Millions of cubic feet per day TCF: Trillion cubic feet, which is 1,000 BCF or 28.32 BCM

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1.12 Insurance and Finance in Israel

1.12.1 Acquisition of holdings in the insurance field in Israel In 2005 and 2006 the Group, through Delek Investments and Delek Capital, and in two transactions, acquired control of The Phoenix1, for a total consideration of approximately NIS 1,882 million. As of the report date, Delek Group holds 55.34% of shares in The Phoenix and 53.71% of the voting rights. The purchase agreement signed with Meir Group stated that it hold shares in The Phoenix which entitle them to 20% or more of the capital and voting rights in the company ("Holding A"), or less than 20% but not less than 10% ("Holding B"), Delek Capital and Delek Investments will use their means of control in order to bring about a situation whereby two directors will serve on The Phoenix's Board of Directors in the case of Holding A, or one director in the case of Holding B, who will be recommended by Meir Group and will be acceptable to Delek Capital and Delek Investments. Today, four directors recommended by The Phoenix are serving on The Phoenix's Board of Directors, out of a total of nine directors (including two external directors). 1.12.2 General information on the field of activity A. Structure of the segment of operation and changes therein The Phoenix was incorporated in 1949 as a private company and became a public company in 1978. Currently, The Phoenix 1 share is traded under the Tel Aviv 75 index, the Tel Aviv 100 index and the Tel Aviv Finance-15 index.2 At the date of the report, most of The Phoenix's activity is in insurance, including various sub-segments, and is carried out through the subsidiary, The Phoenix Insurance Company Ltd. ("The Phoenix Insurance"). This activity includes operations in life insurance and the various sectors of general insurance, compulsory automobile insurance, property insurance, and health insurance. In addition, The Phoenix engages in the management of provident funds, mainly through Excellence Investments Ltd. ("Excellence")3 and pension funds, as well as various finance-related activities on the capital markets. Alongside its insurance and finance operations, The Phoenix, through The Phoenix Investments and Finance Ltd. ("The Phoenix Investments") deals in investments in real estate, artworks, non-bank credit, venture capital investments and other investments. As of December 31, 2009, total assets under The Phoenix's management (including Excellence) amounted to approximately NIS 78 billion, divided as follows: approximately NIS 21 billion in life insurance, not including guaranteed-yield policies (and approximately NIS 26 billion including guaranteed- yield policies); approximately NIS 18 billion in provident funds; approximately NIS 3 billion in pension funds; approximately NIS 15 billion in index-linked notes; approximately NIS 15 billion in mutual funds; approximately NIS 5 billion in portfolio management; and approximately NIS 1 billion in savings policies. The Phoenix is active in four principal segments: 1. Life insurance and long-term savings – life insurance is primarily intended for the long- term and guarantees insurance coverage for the occurrence of the insured event, including, inter alia, the death of the policyholder or the policyholder reaching the age set forth in the insurance policy. In addition, coverage for various risks during the lifetime of the individual (such as illness, handicap and/or disability) may be added to the aforesaid policies. These policies may also include, at the insured party's discretion, a savings component. Life insurance including a savings component constitutes one of the three main alternatives for long-term savings – life insurance, pension funds and provident funds. Provident funds are savings instruments which do not include an insurance

1 In this section, "The Phoenix" refers to The Phoenix Holdings Ltd. and all the companies consolidated in its financial statements. 2 On July 28, 2008, The Phoenix was notified by the TASE that in view of the percentage of the public’s holdings of NIS 5 shares in The Phoenix, which at June 30, 2008 was 4.37%, The Phoenix is not in compliance with the preservation rules as laid down in the TASE articles. On November 24, 2008 and pursuant to a temporary order concerning the preservation rules, the TASE notified The Phoenix that it was granting it an extension until June 30, 2009 to comply with the rules. 3 Excellence was first consolidated in The Phoenix's financial statements on March 31, 2009, at a rate of 80.88%. for details regarding the agreement pertaining to the acquisition of control in Excellence, see Note 14 to the financial statements. As of the date of the report, The Phoenix holds approximately 65.89% of Excellence's issued share capital, after having acquired the "first installment" (as determined in the settlement agreement) of Excellence shares to the amount of 20.44%, in return for approximately NIS 342.6 million, and after acquiring additional shares through transactions outside the TASE.

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component, which in the past offered policyholders a capital track. Today, under the 2008 legislation, these funds offer an allowance track. In addition to its life insurance activities and its provident fund activities (mainly carried out through Excellence1) which are of a substantial scope in The Phoenix, The Phoenix also conducts pension-related activities. Pension funds grant the policyholder a monthly allowance upon his retirement or earlier, and also permits insurance coverage in the event of death and/or disability. 2. The general insurance field, containing three insurance sectors: Compulsory vehicle insurance – this includes the provision of insurance cover for bodily harm caused through the use of a vehicle. The cover is required under the provisions of the Motor Vehicle Insurance Ordinance (New Version), 5730-1970. Vehicle property insurance – this includes the sale of insurance policies for property damage to the insured vehicle, which includes cover for property damage to the vehicle (for example, resulting from an accident and/or theft) (“Comprehensive Insurance”) and cover for property damage caused by the insured vehicle to third parties. (“Third Party Insurance”). Other general insurance – this includes the sale of various insurance policies in three main sectors: property insurance for physical damage to the policyholder’s property (such as apartment insurance and business insurance); third party liability insurance (such as third party liability, employer liability, professional liability including directors and officers liability and liability for faulty products) and other general insurance areas (such as personal accident insurance and contract work insurance). 3. Health insurance – this includes individual and collective illness and hospitalization insurance as well as dental insurance. The policies sold in these areas of insurance cover various forms of harm sustained by the policyholder due to illness and/or accident (except for death). It also includes nursing care insurance and insurance for chronic illness, travel insurance, foreign employee insurance and sick days insurance. 4. Financial services – This segment includes the Excellence Group's activities providing the following financial services: marketing and management of investments for customers, underwriting and investment banking, issue of structured products, issue of financial products, and provision of stock exchange and trade services. Furthermore, this segment includes the activities carried out by the mutual funds, the index-linked certificates and management of Prisma's portfolios, which were acquired by Excellence in 2009. Following is a summary of financial data for the areas of insurance provided by The Phoenix for 2008-2009 (in NIS thousands): 2009 2008 Profit (loss) from life insurance and long-term 145,617 (143,488) savings Profit (loss) from general insurance 118,006 (303,437) Profit from health insurance 162,681 80,438 Profit from financial services 13,084 - Total profit (loss) from areas of operation 439,388 (366,487) Change in liability for an option to acquire an - (5,718) investee company Income less expenses not attributed to areas of (133,520) (238,177) operation The Phoenix's equity in net results of investee 40,671 43,968 companies Profit (loss) before income tax 346,539 (560,696) Tax benefits (income tax) 98,686 (172,303) Net profit (loss) for the period 247,853 (388,393) Attributed to: Profit (loss) for The Phoenix shareholders 227,163 (387,758) Profit (loss) for minority interest 20,690 (635) Net profit (loss) 247,853 (388,393)

1 It should be noted that in addition to the provident funds, Excellence manages pension funds and short-term savings (through Excellence Invest policies – savings policies which do not include an insurance component).

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Structure of the principal holdings in insurance and finance in Israel:

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Investments in The Phoenix's capital in 2008-2009: % of issued capital (as of the Capital investment Date Transaction type investment date) in NIS millions July 14, 2009 Issue of 27,766,161 shares of Shares – 11.21% 125.5 NIS 1 par value each to the public, by way of a rights offer in a shelf offering report

B. Legislation, standardization and special constraints 1. Insurance activities are subject to comprehensive regulation under law, as well as to supervision by the Capital Market Commissioner and the Supervisor of Insurance (“the Supervisor"). The extensive regulation is a factor which has considerable influence on activity; in recent years, regulation increased considerably and changed the nature of activity and competition, mainly in life insurance and long-term savings. For details of regulations governing insurance in general, see section 1.12.17 below; for details of regulations governing life insurance and long-term savings, see sections 1.12.2(D). and 1.12.3(A)(2) below. 2. Restrictions on the distribution of dividends and capital requirements A) In accordance with the Supervision of Financial Services Regulations (Insurance) (Minimum Equity Required from an Insurer) (Amendment), 5758-1998, an insurer will be required to increase, until the date of publication of the financial statements, its equity in respect of the difference between the equity requirements provided under the regulations, before and pursuant to the amendment ("the Difference"). The difference will be calculated for each financial statement date. Equity increases shall be carried out as per the following dates and amounts: until the date of publication of the financial statements for December 31, 2009 at least 30% of the difference; until the date of publication of the financial statement for December 31, 2010 at least 60% of the difference; until December 31, 2011 the full amount of the difference will be completed. B) The aforesaid amounts will be increased by 15% at the date of publication of the half-year financial statements following the above financial statements. In November 2009, an amendment to the equity regulations was published, which added requirements for the following categories, in addition to the existing capital requirements: operating risks; market and credit risks, as a proportion of assets according to the amount of risk characterizing the various assets; catastrophe risks in general insurance; capital requirements in respect of collateral. Furthermore, capital requirements were increased for guaranteed-yield life insurance policies which are either partly or wholly not backed by designated debentures and for the insurer's holdings in companies managing provident funds and pension funds. In addition, reliefs were granted, subject to the Supervisor's approval, pertaining to the manner of calculating capital for information technology development expenses, deduction of tax reserves created in respect of unrecognized assets held in violation of the investment regulations or in violation of the Supervisor's instructions, and reduction of the capital requirements under certain conditions. The amendment caused changes in the definitions for basic capital, tier 1 capital and tier 2 capital, as well as adding a definition for tier 3 capital. Consequently, and pursuant to the Supervisor's intention to adopt in the future the European Union directive for guaranteeing insurer solvency (Solvency II), a second draft notice was published in March 2010 regarding the equity composition for insurers. This second draft notice sets forth rules for the structure of an insurer's recognized equity, as well as a principle framework for recognizing various capital components and their classification into the different levels of capital. C) In June 2009, a second draft was published of a circular for institutional organizations regarding the capital requirements for managing companies. This draft circular proposes to expand the capital requirements for managing companies, so that the new capital requirements include capital requirements according to the

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scope of the managed assets and the manner of their holding, but in any case no less than an initial equity of NIS 10 million. Furthermore, it was determined that deferred acquisition costs and assets held in violation of the investment rules will not be held against the minimal equity requirement. Under these instructions, a managing company, whose required equity at the date of publication of the regulations is less than the equity required under the instructions, will be obligated to increase its equity at least by half the amount required by March 31, 2010, and the outstanding amount by December 31, 2010. Following the transfer of the funds from The Phoenix Provident Ltd. to The Phoenix Pension in 2010, The Phoenix Provident will cease to be a managing company as defined in the Provident Funds Law, and so will not be subject to the provisions and no increase in capital will be required on its account. The Company estimates that to the extent that the aforesaid requirements are adopted in their present form, the capital requirements from the Company under these provisions will increase by approximately NIS 32 million. D) In March 2009, the Supervisor issued a letter stating that as of the financial statements for 2008 and until December 30, 2010, insurance companies and managing companies will not distribute dividends except with the Supervisor's prior approval. According to this letter, as a general rule, no approval will be granted for the distribution of dividends exceeding 25% of the distributable profit. Following this letter, a clarification was issued in March 2010, detailing the criteria for approving the distribution of dividends by an insurer. Under these criteria, insurance companies will be entitled to submit a request for approval to the Supervisor for the distribution of dividends, starting from the date of publishing their periodic reports for 2009, subject to the fulfillment of equity requirements as detailed in the clarification, and upon submittal of an annual earnings forecast for 2010 and 2011, an updated debt service plan approved by the board of directors of the holding company holding the insurance company, an action plan for raising capital approved by the insurance company's board of directors, and minutes of the meeting of the insurance company's board of directors in which the distribution of dividend was approved. However, the clarification states, that a company whose total equity after distribution of the dividend is higher than 110% of the amount required in the clarification, may distribute the dividend without need for the Supervisor's prior approval, provided that such company has notified the Supervisor to that effect, and has submitted the required documents prior to distributing the dividend. The Phoenix's board of directors has decided that no dividend be distributed for 2009, following examination of the Company's financial resources, its investment needs and the Supervisor of Insurance's requirements. It should be clarified that this decision shall not detract from the board of directors' authority to distribute dividends in the future, as it shall deem fit at any time. E) Repurchase of shares – In 2009, The Phoenix did not repurchase any shares. Starting from January 2010, KSM Index Linked Certificate Holdings Ltd., which manages the investments for profit-sharing policies as part of 'The Phoenix Method', purchased the Company's shares on behalf of The Phoenix Insurance during the course of trading through profit-sharing policies. These purchases were carried out under investment licenses for "The Phoenix Method" insurance scheme, which licenses were granted by the Supervisor of Insurance in the Ministry of Finance. The Phoenix is considering the applicability of Section 309 to the Companies Law as regards the purchase of shares carried out by Excellence's index-linked certificate companies. These companies buy and sell shares in The Phoenix according to their obligation under prospectus to track the share indices in which the Company is located. Section 309 to the Companies Law dictates that a subsidiary or another corporation under a parent company's control may purchase shares in the parent company or securities which are convertible or exercisable for shares in the parent company, to the same extent that the parent company may carry out a distribution, provided that the subsidiary's board of directors or the managers of the purchasing corporation have determined that had the purchase of shares or securities which are convertible or exercisable for shares been carried out by the parent company, such purchase would have constituted permissible distribution. Even though both materially and practically it is clear that the purchase of shares by index-linked certificate companies should not be equivalent to distribution of dividends and is

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subject to the distribution tests, The Phoenix is examining the matter so as to find a legal solution in light of the phrasing of Section 309 to the Companies Law. Failure to arrive at such a solution may detract from the surplus for distribution and limit the distribution of dividends in the future. C. Changes in the scope and profitability of activity in the field The most material changes in the insurance business are taking place in life insurance and long-term savings. This is due, inter alia, to the Bachar legislation, which was approved in 2005 and the additional reforms in the field which were approved in 2007 and 2008. For details, see section 1.12.2(D) below. In addition, operating results are materially affected by the economic situation and the capital markets in Israel and abroad and in 2008, the crisis in the capital markets had a severe adverse effect on The Phoenix’s operating results. The loss in 2008 derived mainly from a decline in the results of sectors of operation and an increase in financing expenses caused by a rise in the Israeli CPI. However, it should be noted that in early 2009, the trend observed in 2008 reversed, and in the first six months of 2009 results from The Phoenix's segments of operation amounted to a profit of approximately NIS 298.9 million (compared to a profit of approximately NIS 17.5 million in the same period last year, and a loss of approximately NIS 366.5 million in 2008). The principal factors for the transition to profitability in the first six months of 2009 are: the material increase in investment profits, and the consolidation of the finance segment in the financial statements starting from Q1/2009. In the report period, profits totaled approximately NIS 134.8 million, compared to a profit of NIS 68.6 million in the same quarter last year, an increase of 96.5%. This increase is due mainly to increased profitability in the segments. Income statement results state a profit of approximately NIS 113.5 million compared to a profit of approximately NIS 68.6 million in the same quarter last year, an increase of 65.5% which was due mainly to those factors detailed above. In Q1/2009, income statement results stated a profit of approximately NIS 113.5 million compared to a profit of approximately NIS 68.6 million in the same quarter last year, an increase of 65.5% which was due mainly to those factors detailed above. D. Market developments in the areas of operation The Bachar reforms In July 2005, legislation was enacted for implementation of the Bachar Commission recommendations: the Increase of Competition and Reduction of Centrality and Conflicts of Interests in the Israeli Capital Market Law (Legislative Amendments), 5765-2005 (“the Competition Law"); the Supervision of Financial Services Law (Provident Funds), 5765-2005 (“the Provident Law"); the Supervision of Financial Services Law (Activity in Pension Consultancy and Pension Marketing), 5765-2005 (“the Consulting and Marketing Law"). These laws (“the Bachar Legislation") were intended to implement the Bachar Commission recommendations in the following areas: 1. A structural change in the capital market, with the aim of separating activities with a potential for competition, and especially the enactment of a prohibition against the holding of provident funds, trust funds or insurers by banks. 2. Reduction of the centrality and conflicts of interests in the capital market, especially due to holdings by major banks in trust companies, provident funds and underwriting companies. 3. Distinction between a consultant and a marketer, and regulation of their roles and duties towards the client. 4. Establishment of a new sales model and the duty of best advice – that is, adapting the product to the client's needs. 5. A permit for banks to provide consultancy and distribute pension savings products. 6. Establishment of the employee's exclusive right to choose a provident fund or a pension scheme. For additional details with regard to the Bachar Legislation, see section 1.12.17(C). below. The laws entered into force in the fourth quarter of 2005 and the first half of 2006, and caused material developments in a number of areas:

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A) The banks sold most of the provident funds and trust funds which they had previously owned. Most of the provident funds were acquired by the various insurance groups. B) Along with the separation of the provident funds and trust funds from the banks, the Bachar Legislation enabled banks to enter the field of consultancy and distribution of pension products. This possibility was opened to the banks gradually, subject to their compliance with various conditions. In 2006 - 2008, several medium-sized banks began to deal in pension consultancy, with regard to pension and provident funds and the large banks also received licenses to give pension advice. C) The institutional entities have developed systems which support the Best Advice model, in cooperation with the banks, and have trained their employees to comply with the licensing requirements for pension marketing. D) Public awareness regarding the yield of the financial products has increased – among other things, due to the handling of this subject by the media, including quotation of monthly and annual yields, and due to the introduction of systems which compare financial savings products. Amendment No. 3 to the Provident Fund Law January 28, 2008 was the date of publication of Amendment No. 3 to the Provident Fund Law, which has material implications for the activity in the field. The amendment includes a series of amendments to the Provident Fund Law, the Supervision Law and the Income Tax Ordinance. The objective of the amendment is to ensure a more transparent and sophisticated market for all persons saving up for retirement, by unifying the taxation rules applying to pension products, making significant decisions by savers close to retirement age with regard to the amounts in savings, ensuring that all savers have a pension component in their savings, and increasing competition in the pension market for the benefit of consumers. The amendment sets forth, inter alia, provisions regarding the classification of provident funds into two types of pension provident funds: a pension provident fund which pays a pension directly to eligible persons, pursuant to the fund regulations, and a pension provident fund which does not enable direct withdrawal of monies deposited therein, except for monies from the severance pay component, monies from pension components that were deposited prior to December 31,2007 and monies unlawfully withdrawn from the pension component, unless by transfer of those monies to a provident fund which pays a pension. The Phoenix estimates that the provisions of the amendment are likely to increase the extent of competition in the pension insurance sector, primarily as a result of unification of the tax provisions in the sector which is likely to increase the interchangeability of the various products. Among other things it is possible that the provident fund sector will be harmed by the requirement to deposit savings in a pension fund in a manner which highlights the difference between a provident fund and a pension fund and is likely to create a preference for pension funds and insurance policies which pay into pension funds. Portability of pension savings On March 24, 2008, the Knesset Finance Committee approved the Supervision of Financial Services (Provident funds) (Transfer of monies between funds) Regulations, 5768-2008, which govern transfers between the various pension savings products: provident funds, life insurance schemes and pension funds. The new regulations enable consumers to move from one pension savings product to another, or to replace the entity which manages the savings with another managing entity, at any time, without payment when transferring monies between the products and in accordance with their preferences. The objective of the law is to encourage competition, increase the efficiency of the pension products, and improve the service given to consumers. The guiding principle of the pension portability plan is that pension monies can be moved from one pension plan to another and from a capital plan to a pension plan, but it they cannot be moved from a pension plan to a capital plan. This is in line with government policy, which encourages pension channels over capital channels, as also expressed in Amendment No. 3 to the Provident Fund Law, as set forth above.

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The provisions of the regulations governing the portability of pensions include, inter alia, provisions concerning the relevant dates for transfer of monies and insurance liability from the transferor fund to the recipient fund, the calculation method for the transferred amounts, the transfer method of the monies, consolidation and splitting of accounts, the status of members in the transferor fund (active / inactive), and the types of funds. The Phoenix estimates that the regulations governing pension portability are likely to have a material impact on The Phoenix's future activity and/or business results, as they are likely to cause increased competition and reduced margins on some of the existing life insurance portfolios. Life insurance and provident funds, at the date of the report, constitute the principal pension channels in the asset portfolio managed by The Phoenix and Excellence. Transfer from these channels to pension funds is likely to have a material negative effect on the preservation of the existing life insurance and provident fund portfolio of The Phoenix and Excellence, and accordingly, on the income therefrom. Compulsory pension arrangement On November 19, 2007, a general collective agreement for pension insurance in Israel's economy was signed by the Coordination Office of Economic Organizations and the New Histadrut – Israel General Federation of Labor. The agreement includes a requirement for employers to deposit monies in a pension provident fund on behalf of their employees, as set forth in the collective agreement, starting in January 2008, and thereafter. On December 30, 2007, the Minister of Industry, Trade and Labor enacted an expansion order for comprehensive pension insurance pursuant to the Collective Agreements Law, 5717-1957 (“the Expansion Order”) which expands the application of the provisions of the collective agreement to all employees and employers in the market, applied retroactively from January 1, 2008. The Phoenix estimates that the collective agreement and Expansion Order are likely to expand the group of policyholders and lead to growth in the pension funds, including those owned by The Phoenix. According to The Phoenix’s data, out of the 64,000 new policyholders who joined pension funds managed by The Phoenix, some 51,000 joined following the compulsory pension arrangement. It should be noted that in the first five years, profitability is expected to be very low because the low percentages of allocations to social benefits give rise to low premiums, resulting in low management fees. On the other hand, operating expenses are relatively constant. Aside from the aforesaid material developments, the following trends in long-term savings have become evident in recent years: increased transparency of pension products; encouragement of savings for pension purposes; increase in consumers' awareness and heightened competition; changes in regulations with regard to the investment management; and increased enforcement by the Capital Market Division. The economic crisis and recovery in 2009 In 2008 – mainly in the third quarter of the year and onwards – sharp drops occurred in the various investment channels both in Israel and abroad, and these channels experienced exceptional volatility, against a backdrop of the global financial crisis which developed into a real global economic crisis. In light of this crisis, 2009 began with grave concerns regarding a financial crisis which would lead to a recession – both globally and in the local market. However, 2009 saw a positive turn in both economic and capital market activities. Insurance companies, pension funds, provident funds and companies operating in the Israeli market, including The Phoenix, invest a significant portion of their assets in the capital markets in Israel and abroad. Yields in the various investment channels on the capital markets have a material impact on the yield for The Phoenix's customers and on its assets, equity and profitability. The improvements witnessed in the capital markets during 2009 have a material impact on the segment of activity, including the following: a material improvement in the results of the insurance segments compared to 2008; substantial profits in investment activities carried out by The Phoenix, in The Phoenix's nostro portfolio, and in investments in collateralized debt obligations, mainly due to the increased value of the marketable assets; nearing the target date for renewed

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collection of variable management fees after the 2008 losses (when a positive cumulative real yield is achieved which covers all negative real yields remaining from the 2008 losses, The Phoenix will be able to renew the collection of variable management fees); and activities for the reduction of portfolio risks, in the long term, which were made possible due to the positive market atmosphere. Measures enacted by the Capital Market, Insurance and Savings Division following the global economic crisis On March 24, 2009, the Supervisor published a document regarding "Measures in the pension savings market pursuant to the global economic crisis". This document details the various measures implemented by the Ministry of Finance Capital Market, Insurance and Savings Division, aimed at providing better protection for savings, such as adapting investment risks to customer requirements; reducing the number of investment channels in pension savings products; setting customer service standards and increasing accessibility; publishing of expected investment policies; establishment of individually-managed provident funds; matching the remuneration for investment managers in institutional organizations and the performance of these organizations in the long term; increasing the strictness of investment rules for the nostro funds of insurance companies; and arrangements related to methods for investing in debentures and management thereof, and for ongoing monitoring of loan portfolios by institutional organizations. Furthermore, in February 2010, the Hodak Committee appointed by the Supervisor submitted its recommendations for rules governing investments by institutional organizations in debentures. E. Critical success factors in the field of activity The critical parameters for success are: growth in the economy, in the percentage of employment and the conditions in the capital markets; a response to the changing tastes of the public – adaptation of existing products and development of new products and tracks, including provision of integrated solutions; support of the existing marketing system and development of additional marketing systems and distribution channels; provision of regular high-quality service for customers and agents, with a view towards conserving the existing client portfolio and increasing the market share; provision of high-quality information which is available to clients and insurance agents; high yields, in light of the public's increased awareness of the importance of yield for the amount of savings to be obtained from a life insurance policy, a provident fund or a pension fund; tax benefits for savings which affect the scope and manner of savings for retirement by the public; operational efficiency (level of sales and operating costs); information system levels; retention and development of high-quality human capital as well as the high professional standard of The Phoenix’s employees; preservation of the existing client portfolios; large market share making it possible to respond to customer requirements and distribution channels while maintaining higher profitability; correct actuarial pricing of the savings components in the various products; compliance with regulatory requirements; coping with the comprehensive changes which are applicable to the long-term savings sector and likely to continue; frequency and severity of insurance claims, exceptional cases of damage and changes in the distribution of damage; position of the reinsurance market and compliance with reinsurer commitments; the ability of The Phoenix to develop / enter into financial services operations and creation of synergy with The Phoenix's operations in the long-term savings segment. F. Principal entry and exit barriers in the segment The principal entry barriers for the insurance operation are: licensing for The Phoenix, pursuant to the provisions of the Supervision of Financial Services (Insurance) Law and the licensing requirements for provident funds; legislative and regulatory requirements with regard to insurers' equity; establishment of supportive information systems; establishment of a sales and service system; establishment of investment capabilities; creation of working relationships with reinsurers; and various regulatory requirements. Moreover, the Bachar Legislation has resulted in a demand for the licensing of employees active in certain fields, which could constitute an entry barrier from the standpoint of human resources. The principal exit barriers are long-term liabilities towards policyholders and members, the long period of time required in some sectors for settlement of past claims (runoff), and regulatory requirements.

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G. Substitutes for products in the segment and changes therein In the general insurance sectors, substitutes for The Phoenix's products are being offered by other insurance companies issuing similar products. The principal differences between the products in these fields are tariffs and scope of cover. In the long-term savings sector, the life insurance, provident fund and pension fund policies issued by other insurance companies and institutional entities represent substitutes. In addition to these instruments, there is a wide variety of investment instruments (trust funds, savings plans and so forth) which may constitute substitutes to the products in this sector. In the financial services segment, substitutes are the selection of an alternative management method, financial instruments offered by banks and other investment houses, issue of loans from banks or non-bank organizations, and all investment and savings products available on the market. H. Structure of competition in the segment and changes therein According to data from the Ministry of Finance, there are 24 insurance companies in Israel (including Avner), of which 13 are active in life insurance. The five major insurance groups in the insurance market (which, as set forth above, also hold pension funds and provident funds) are The Phoenix Group, Clal Group, Migdal Group, Harel Group and Menorah – Mivtahim Group. In 2009, these groups held a joint market share of approximately 90.5% of life insurance premiums and approximately 70.7% of general insurance premiums (including health insurance). Further details of the competition structure appear in the description of the various sectors below.

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1.12.3 Products and services Financial information with regard to the insurance sectors in 2008 and 2009 (in NIS millions): Life insurance and long- Compulsory vehicle Property vehicle Other general Health term savings1 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 Gross premiums 2,646,697 2,637,900 359,631 321,341 594,973 576,659 876,029 789,844 1,031,569 870,295 Premiums less reinsurance (residual) 2,578,272 2,570,364 345,255 310,488 594,987 576,663 487,353 442,091 832,096 712,853 Payments and changes in liabilities for insurance and investment contracts, gross 6,707,213 (1,308,502) 391,302 388,252 387,790 391,249 500,301 446,244 741,641 579,846 Payments and changes in liabilities for insurance and investment contracts (residual) 6,644,602 (1,342,506) 366,803 367,939 383,243 391,460 318,153 303,167 577,978 452,759 Pre-tax profit (loss) 97,134 (143,083) 20,071 (188,613) 45,477 (5,073) 52,458 (109,751) 162,681 80,438 Total insurance liabilities, gross 25,733,808 20,315,339 1,897,386 1,849,549 399,182 383,097 2,092,822 1,980,008 1,135,286 965,276

The following table summarizes the financial results for the finance segment, as presented in The Phoenix's financial statements for the year of the report:

2009 2008* Revenues from investments, net 5,000 - Revenues from management fees 136,500 - Revenues from other financial services 168,860 - Total revenues 310,360 - The Phoenix's equity in the net results of an investee company 5,000 - Pre-tax profit 13,084 -

* Operations in this segment are carried out through Excellence, for which The Phoenix has consolidated its results as of the year of the report.

1 Including Excellence provident and pension funds.

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A. Life insurance and long-term savings 1. General: The Phoenix operates in all long-term savings areas and in all types of pension funds and provident funds. Most of The Phoenix’s operations at this date are in life insurance and provident funds (provident fund activities are mostly carried out through Excellence) and it operates in a more restricted fashion but in increasing volumes, in the pension sector. Life insurance - A range of life insurance policy products are offered to customers, including an option of integrating insurance covers (e.g. insurance against death, work disability as well as other coverage) with retirement savings which the customer can redeem upon retirement or at another time. This allows the policyholder to choose the most appropriate component in these policies from the insurance covers (“Risk”) and the financial accrual for retirement (“Saving”). Until January 1, 2008, policyholders also had the option of choosing policies known as insurance funds, pursuant to the provisions of the Income Tax Regulations (Rules for Approval and Management of Provident Funds), 5724-1964, how benefits would be received – a capital track allowing a one-time withdrawal of funds from the age of 60 or an allowance track offering the policyholder a monthly allowance from the age of 60. Following Amendment No. 3 to the Provident Fund Law, at January 1, 2008, it is no longer possible to choose between a capital track and a pension track and retirement savings are offered on a pension track only (except for the severance pay component). Policies with a savings component are divided into several major types, which are distinguished by the way investments are made by the insurance companies, the types of cover and the management fees or expenses charged by the insurance companies (such as yield-ensuring policies and profit-sharing policies). The activity in the life insurance sector includes a combination of sales of new policies and provision of service to policyholders under existing policies which have been sold from the starting date of The Phoenix's activity until this day . The life insurance sector has undergone extremely significant changes, starting in 2000, with regard to a number of aspects. These include the types of schemes operated, the rules of taxation which apply to the insurance schemes, and how the monies of policyholders are invested. The year 2005 was characterized by considerable changes in regulations, including the passing of the Bachar Legislation in the Knesset in August 2005, which led to a comprehensive structural change in the capital market in general and the long-term savings sector in particular. In addition, in 2007 and 2008, the life insurance sector underwent additional significant changes as a result of the reform which enabled mobility of pension savings, Amendment No. 3 to the Provident Fund Law and the compulsory pension arrangement. For further details concerning the aforementioned reforms, see section 1.12.2(D) above. In life insurance and long-term savings, The Phoenix markets executive insurance, individual life insurance, group life insurance, work disability insurance, a range of insurance plans and savings policies. Provident funds – A provident fund is a long- or medium-term savings instrument, which benefits from tax benefits granted under the Income Tax Ordinance and in provident fund-related legislation. Provident funds are a "pure" savings instrument, where funds are saved and their yield is paid to the policy holder upon his reaching retirement age, without any insurance component. Each member in a provident fund has a separate account. The moneys kept in the provident funds are invested according to the Supervision of Financial Services Law (Provident Funds), 5765-2005. Following amendment 3 to the Provident Funds Law, starting from January 1, 2008, provident funds also became an allowance-based savings instrument. Yields are divided among the members of the fund according to their share in the fund's assets. There are several types of provident funds: provident funds for personal compensation and remuneration in which, for employees, both the employee and the employer make regular monthly deposits from the employee's salary, while for self-employed individuals, the member deposits funds without any additional payment from an employer; personal compensation funds, in which the employer deposits funds to guarantee severance pay for employees (the employer is the fund member, and moneys are accumulated in a coordinated manner in the employer's name on behalf of his employees); provident funds for sick-leave, in which the employer accrues moneys for payment of sick leave. In addition, provident funds also include study funds which do not constitute a pension savings instrument, but rather a medium-term savings instrument. Study funds allow members to accrue funds for continuing education, and offer members tax benefits. Funds accumulated in a study fund are redeemable for

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study purposes starting after three years of membership in the fund. After six years' membership, the funds can be withdrawn for any purpose whatsoever. Companies managing provident funds charge management fees, which serve as their source of income. The Phoenix manages provident funds and study funds through The Phoenix Provident and through Excellence Provident and Pension, which manage remuneration and compensation funds, study funds, and a central compensation fund. In addition, The Phoenix manages pension funds on a smaller, although gradually increasing, scale. Pension funds, like life insurance savings policies, is a savings instrument used to pay members a monthly allowance for the rest of their lives following their retirement. Pension funds allow the following insurance coverages: old-age pension is an allowance paid to members from their retirement and for the rest of their lives. In addition, following the entitled member's death, their spouse, as defined in the fund statute, is entitled to a certain percentage of the allowance received by the member, for the rest of their life; disability pension is an allowance paid to members who have lost their ability to work, according to the decision of the fund's medical committee; survivors' pension is an allowance paid to the survivors (widow and orphans) of members who have died during the insurance period. Pension funds are divided into three types: senior pension funds (under special management/ ordinary management), new comprehensive pension funds, and new general pension funds. Remuneration fees received from pension fund members are divided into risk components (in the event that insurance coverage was purchased), a savings component, and a management fee component. Companies managing pension funds derive their revenues from management fees (from the remuneration fees and from the accrued amounts), and the profit margin is the difference between the net management fees (after deducting benefits paid to the insured as made according to company policy. Pension fund claim payments are made from the pension fund, i.e. -–from member assets, so that the insured bear the cost of claims payments and risks. 2. Regulation: Aside from the legal provisions set forth above, life insurance and long-term savings activities are subject to two principal legal frameworks: The first framework includes the Insurance Contract Law, 5741-1981; the Supervision of Financial Services (Insurance) Law, 5741-1981; the Provident Funds Law; the Consultancy and Marketing Law; and regulations, orders and Supervisor's circulars issued by virtue of those laws. This legal framework governs material issues in The Phoenix's activity in the field of conclusion of an insurance contract, the duties of the parties to an insurance contract, the ways of operation of insurers and insurance agents, rules of investment, recognition of expenses, terms and conditions of insurance schemes, due diligence for policyholders, and ways of operation for insurance agents, pension marketers and pension consultants. The legal framework also governs issues such as the corporate regime of institutional entities, the rules of investment, reports to policyholders and to the public, and so forth . The second legal framework deals with the tax benefits of the pension instruments and includes the Income Tax Ordinance and the Income Tax Regulations (Conditions for Approval and Management of Provident Funds), 5724-1964 (“the Provident Fund Regulations"). This legal framework confers a special status on provident funds, which also include pension funds and insurance funds, with regard to tax credits and deductions and exemptions from capital gains tax, with the aim of encouraging the public to save for retirement by means of provident funds and insurance funds. Life insurance schemes which include an insurance component, and which are recognized as insurance funds ("managers’ insurance policies" and "benefit policies for self-employed persons"), also benefit from the special status conferred upon provident funds by the Income Tax Ordinance and the Provident Fund Regulations. The Income Tax Ordinance and the regulations enacted by virtue thereof, generally speaking, set forth rules and tax provisions with regard to insurance schemes marketed by The Phoenix. Within the framework of Amendment No. 3 to the Provident Funds Law, the tax rules which apply to the various pension savings products were unified, such that all products entitle savers to the same tax benefits, so that the public are able to make decisions based on their pension needs, with no bias due to tax considerations. The tax benefits primarily include the possibility of a tax credit for the policyholder / member, as well as a

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deduction permit for the employer. In addition, savings for retirement, pursuant to the tax provisions, enable exemptions from pension tax and capital gains tax. 3. Changes in the scope of activity and profitability: The scope of activities in the long-term savings segment has a high correlation to the conditions in the local economy. Life insurance - The profitability of the life insurance sector is affected to a great degree by the results of investment in the capital market. According to data from the Ministry of Finance, at December 2009, total life insurance assets in the sector increased by approximately 24%, compared with the corresponding period in 2008, due to increased value on the capital markets in 2009. In the first quarter of 2009, there was a moderate increase of approximately 3.3% in life insurance assets and in the second quarter there was an increase of approximately 8.5%. In the third and final quarters of the year, there was an increase of approximately 6.8% and 3.5%, respectively, in life insurance assets. In 2009, The Phoenix's profit in the life insurance sector totaled approximately NIS 88.9 million, compared with a loss of approximately NIS 147.4 million in 2008. The transition from losses in 2008 to profitability in 2009 was due to positive returns on the capital market, and from a reduction in general and administrative costs. It should be noted, that due to the negative yield in profit-sharing policies, accrued during the prior period, no variable management fees can be charged until a positive yield is achieved which will offset the negative real yield so far accumulated in profit-sharing policies between 1991 and 2003. For details of an estimate of the management fees which will not be collected because of the negative yield in The Phoenix Insurance, see section 1.12.3(A)(5) below. Provident funds – According to Ministry of Finance data, the total assets managed in provident funds increased in 2009 by 28%, compared to a decline of 22% in 2008. The increase in total assets in the provident funds segment in 2009 is due mainly from positive yields on assets during the year. Pension funds – According to Ministry of Finance data, total assets in the pension segment grew in 2009 by 17%, with accelerated growth continuing in the new pension funds segment, which grew by 47% in 2009, following 4% growth in 2008, despite the crisis in the capital markets. It is safe to assume that this elevated growth rate in assets is mainly due to the rise in public awareness to pension savings in general and to retirement pension in particular, transfer from other long-term savings channels (mainly the pension funds segment), entry of insurance agents who began selling pension plans, and the coming into effect of the compulsory pension arrangement. Furthermore, the pension segment enjoyed positive yields throughout 2009. 2009 saw a 28% increase in yields compared to 2008 in management fees from assets and from remuneration fees in The Phoenix's pension and provident funds. This increase was due from growth in the average scope of assets and from collection of comprehensive pension funds and provident funds 4. Competition: In recent years, there have been changes in the long-term savings sector which have increased competition. The sector has become affected by substitute products that meet the need for retirement savings. The Bachar reform, which separated the provident funds and trust funds from the banks and allowed them to enter the pension product sector, also contributes to increased competition in the sector, as well as other reforms, primarily the pension mobility reform, and the policies enacted by the Capital Market Division aimed at increasing the transparency of pension products for consumers. Life insurance - In Israel, there are five principal insurance groups in the life insurance sector: The Phoenix, Migdal, Clal, Harel and Menorah, as well as a number of smaller insurance companies. According to data provided by the Ministry of Finance for the first nine months of 2009, The Phoenix is in fourth place with regard to insurance premiums, with a market share of 14.9%, compared with market shares of 15.1% and 15.7% in 2008 and 2007, respectively. The market shares of the other principal groups in 2009 were as follows: Migdal (30.1%); Clal (21.7%); Harel (15.7%); and Menorah (8.1%). Provident funds – The requirements set forth by the Bachar legislation for the sale of provident funds (and trust funds) by the banks, has led to a structural change in ownership in the provident funds segment, and a large portion of the provident funds offered for sale were acquired by the various insurance groups. Furthermore, due to expected regulatory demands by the Ministry of Finance, such as a increased equity

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requirements, and a requirement to reduce the number of funds held by a managing company (one fund of each type), the decline in the number of organizations managing provident funds continues. According to Ministry of Finance data, while the number of controlling corporations totaled 74 in 2007, this number went down to 58 and 48 in 2008 and 2009, respectively. Pension – Legislative changes have positioned pension funds as a competitive alternative to executive insurance (at least on the initial level of pension savings). This is particularly true as regards allowance-based pension insurance. The main players in the pension market are Menorah Mivtachim, Makefet Personal (Migdal Group), Meitavit – Atudot (Clal Group), Harel Pension, and The Phoenix Pension. 5. Investment management: Life insurance: The principal distinction to be made in investment management of monies from life insurance policies is between guaranteed-yield policies and profit-sharing policies. Investments of monies from guaranteed-yield policies – the policies issued up to December 1990 by The Phoenix Insurance guarantee members a yield of 3%-5% linked to the CPI. The yield guarantee is partly backed by designated government bonds issued every year to the insurance companies. Several years ago there was an early redemption of some of these bonds (up to 50% of the reserve). The money redeemed was invested in long-term investment instruments, mainly in long-term bank deposits. Investments of monies from profit-sharing policies: In 1991, investment profit-sharing policies were marketed for the first time to policyholders. The Ministry of Finance issued, for 40% of the accrual, designated bonds bearing annual linked interest of 4%, while the balance of the monies was invested in various investment channels in the capital market in Israel and abroad. Since 1992, all the monies of policyholders has been invested in capital markets in Israel and abroad in government bonds, bank deposits, corporate bonds with investment ratings – marketable and non-marketable, and shares. Furthermore, The Phoenix Insurance invests, through managing entities, in investment, hedge and real estate funds with the aim of building a long-term investment portfolio with a high yield and low fluctuation. In respect of policies issued since 2004, The Phoenix Insurance offers profit-sharing policies which gives policyholders the option of choosing investment tracks for the management of their savings, such as bonds, shares, CPI-linked, etc.. It is noted that because of the negative yield in profit-sharing policies, The Phoenix Insurance did not collect variable management fees in the period of the report, and it will not be able to do so as long as an accrued real positive yield is not achieved to cover the negative yield so far accrued. It is estimated that the management fees which will not be collected because of the negative yield until the above-mentioned positive yield is achieved at December 31, 2009, amount to NIS 229 million and NIS 178 million at February 28, 2010. This will have an adverse effect on collection of management fees and the future profitability of The Phoenix. Pension: Approximately 45% of the members' monies in the Amit Pension Fund for Veteran Associates are invested in "Meiron"-class designated debentures, which bear a yield of 5.57% linked to the CPI, and the issue of which was discontinued on September 1, 2003. Therefore, the pension fund may invest up to 30% of its assets in "Arad"-class designated debentures, which bear a yield of 4.68% and are linked to the CPI, provided that the cumulative weight of the assets invested in "Meiron" and "Arad" debentures not exceed 30% of the pension fund's revaluated assets. As of December 31, 2009, the non- guaranteed investment rate is 55%, and is invested mostly in government bonds and high-rating corporate bonds, while share holdings account for 9% of the pension fund's assets. As the fund is long-standing and balanced, the Amit Pension Fund for Veteran Associates is entitled to government support for its assets. Member funds in The Phoenix Comprehensive Pension Fund - Following the reforms in the pension market, starting January 1, 2004 the issue of designated debentures to pension funds with a yield of 5.05% and linkage to the CPI has been discontinued, so that their share not exceed 30% of the fund's total assets. The remaining funds are invested in a variety of different investment vehicles in Israel and abroad. As of December 31, 2009, the non-guaranteed investments rate was 70% and holdings in shares and investment funds in Israel and abroad accounted for 22% of the pension fund's assets. The investment policy in the funds is determined by the member funds investment committee, which convenes every two weeks, and follows the investment strategy laid out by The Phoenix Pension's board of directors or by the Amit council, respectively.

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6. Principal products in the field: In the life insurance segment, The Phoenix markets executive insurance, individual and group life insurance, disability insurance, a range of insurance plans and savings policies. The Phoenix offers the following basic insurance policies: Executive insurance: This insurance originates in employer and employee provisions to ensure the employee's social rights to compensation, rewards and disability insurance. For these premiums, one may purchase a saving scheme for retirement and allocation of a premium for risks (such as death and work disability). Following Amendment No. 3 to the Provident Fund Law, monies for retirement can only be withdrawn in a group track, with the exception of the savings component for retirement accumulated up to December 31, 2007, which remains as a capital component. The target market is employers who purchase managers insurance for their employees. Managers insurances are divided into a number of insurance plans, in accordance with the periods in which they were marketed (Endowment, Adif, track and life tracks). Personal insurance: There are two types, intended for the self-employed and private individuals: compensation for self-employed individuals - pursuant to the law of self- employed worker compensation insurance, i.e., that enjoy tax benefits; policies with provisions that do not enjoy tax benefits, apart from a 25% credit for premium paid for death coverage. The terms for the personal policies were brought in line with those for executive insurance. Other insurance policies offered by The Phoenix are pure risk life insurance, work disability insurance and more. Guaranteed-yield policies carry a charge for the difference between the guaranteed yield for the insured and the actual yield. In profit-sharing policies, management fees are charged according to the particular policy. These management fees are calculated according to the Supervisor's instructions based on the policies' yields, and are charged from the accumulated savings of the insured in the profit-sharing portfolio. Management fees for policies sold until December 31, 2003 include fixed and variable management fees, and management fees charged for policies sold from 2004 onwards include only fixed management fees. These fixed management fees are calculated at fixed rates from the accumulated savings. The variable management fees are calculated as a percentage of the real profit for the policy net of the fixed management fees charged for that policy. Only positive variable management fees can be charged, at a rate of 15% of the real profit achieved, net of any negative sums accrued in the previous years. During the year, the variable management fees are recorded on an accrual basis according to the real monthly yield, provided that such yield is positive. In months where the real yield is negative, the variable management fees are reduced according to the monthly yield, up to their negation. Negative yields for which the management fees were not reduced during the year will be deducted for the purpose of calculating the management fees from positive yields in the future. For information regarding the estimate for management fees not charged due to negative yields, see section 1.12.3(A)(5) above. The Phoenix manages provident funds and study funds through The Phoenix Provident and through Excellence Provident and Pension, which manage remuneration and compensation funds, study funds, and a central compensation fund. The provident funds are operated according to the Income Tax Regulations (Rules for Approval and Management of Provident Funds) 5724 - 1964. The Phoenix Provident manages five provident funds: The Phoenix Rewards and Compensation, which is an investment route- based provident fund. This means that members may choose the investment route for their moneys. The fund is designated for personal remuneration and compensation for employees. Upon the occurrence of an entitling event, the member or beneficiary receives the cumulative moneys credited to the member in the provident fund, according to the fund statute; The Phoenix Central Compensation, which is open strictly to employers and which is designated for employee compensation payments. This fund does not have any investment routes, and moneys are invested according to the discretion of the Company and the investment committee; The Phoenix Study Fund, which is intended for payment of study fees for employees, self-employed individuals, Kibbutz members, communal Moshav members, or beneficiaries, according to the fund statute. Members may choose their investment route; The Phoenix Rewards and Compensation (Closed) (a track-based provident fund which is closed to new members as of January 1, 2006); and The Phoenix Central Compensation (Closed), which includes

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only employers, is intended for payment of employee compensation, and is closed to new members as of January 1, 2006. Excellence Provident and Pension manages 18 personal remuneration and compensation funds, 7 study funds, and 5 central compensation funds. In October 2006, Excellence undertook agreements with Mizrahi-Tefahot Bank for acquiring the operation of funds managed by Mizrahi-Tefahot Bank (excluding Mizrahi-Tefahot's holdings in Netivot Provident Funds Management Company Ltd. and 19 funds in all), in return for approximately NIS 337 million. As part of this transaction, the parties also signed an operating agreement, a distribution agreement, and an agreement for the provision of special services. Furthermore, the services agreement, inter alia, arranges for the management of The Phoenix pension policies with managed investment tracks known as "Excellence Invest". Exellence Provident and Pension's main pension products are as follows: personal provident funds for remuneration and compensation, for payment of remuneration and compensation to employees and self-employed individuals. Excellence offers personal funds on various tracks according to the savings level chosen by the member; a study fund, for employees and self-employed individuals, which allows members to accumulate monies for study purposes and receive tax benefits. The monies accumulated in the fund are redeemable for study purposes starting from the end of the third year of membership in the fund. After six years' membership in the fund, the monies can be withdrawn for any reason; and central provident funds for compensation, intended for employers seeking to accrue monies for guaranteeing severance pay for their employees. As aforesaid, these funds are closed to new members since January 1, 2006, and their activities will be terminated starting January 2011. The Group's operations in the pension segment is carried out through The Phoenix Pension and through Excellence Nessuah Gemel & Pension Ltd.. The Phoenix Pension manages the following funds: The Phoenix Comprehensive Pension, which in 2009 operated 15 insurance channels differing in their level of coverage, the nature of coverage, and the retirement age; The Phoenix General Pension, which operates together with the comprehensive pension fund and any deposits above the aforesaid maximum are made to this fund. The fund operates two savings channels, is not entitled to designated debentures, but is not subject to restrictions on maximum deposits, and permits one-time deposits; Amit Pension Fund for Veteran Associates, which is closed to new members. The fund is not owned by its members, and according to a management agreement signed in 1993 is managed by The Phoenix Pension. So long as the management agreement remain valid, The Phoenix Pension appoints 51% of the board members, and holds 51% of the vote in the board of directors and in the general meeting. Excellence Provident and Pension manages the following two pension funds: Excellence Nessuah Pension, a comprehensive pension fund which includes the three pension components (old-age, disability, and survivors) and offers, in addition to its savings component, a variety of pension channels, including insurance coverage for disability and death; and Excellence Nessuah Pension Savings, a basic-type (savings) general pension fund. The fund does not include the insurance components, and so allows greater accumulation of monies for savings. Furthermore, the fund permits one-time deposits. The fund invests 100% of its assets in non-guaranteed investments. "The Phoenix Method" – In 2009, The Phoenix launched "The Phoenix Method" for managing long-term savings. This program implements a well-known methodology implemented around the world (mainly in the United States and Europe) for managing pension savings investments. "The Phoenix Method" is based on the establishment of personal pension savings portfolios using the Life Cycle method, which is customized to the preferences and characteristics of each particular client (based on the client's risk range and risk perception). Asset allocation for each client will be carried out using marketable indices in Israel and abroad. Assembly of the client's long-term investment portfolio will be carried out based on a unique model developed by The Phoenix, in collaboration with members of academia, and based on research in Israel and abroad. It should be noted that the method fits the possible future shape of the financial arrangement system as regards long-term savings, as determined by the Supervisor as detailed in section 1.12.2(D) above. 7. Clients: The Phoenix markets its products to a wide range of customers, divided into three main groups – employers and employees, personal and self-employed and cooperatives.

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In 2008, the breakdown of life insurance premiums was as follows: employers (executive insurance) – 76.5%, individuals and self-employed – 19.3%, collectives – 4.2. In the pension segment, the number of insured persons grew in 2009 compared to 2008, both in The Phoenix Pension and in Excellence Provident and Pension. This increase was due, inter alia, to the addition of new insured persons following the compulsory pension arrangement. In 2009, members in The Phoenix Provident and in Excellence Provident and Pension's provident funds were distributed according to the following types: in study funds: employees - 75% and 80%, respectively. Self-employed individuals - 25% and 20%, respectively; in funds for compensation and remuneration: employees - 62% and 26%, respectively. Self-employed individuals - 38% and 76%, respectively. In remuneration and compensation funds: employees – 91% and 0%, respectively. Self-employed individuals – 9% and 0%, respectively. Employers – 0% and 100%, respectively. 8. Marketing and distribution: Until the Bachar reforms, most life insurance plans were sold by insurance agents, including individual agents, independent agencies, and agencies owned by insurance companies. The Bachar legislation in general, and the Consultancy and Marketing Law in particular, led to changes in the sale and distribution of life insurance schemes, pension and provident fund products and determined to tracks for distribution of pension products: pension consultancy (a person or corporate entity providing consultancy to an individual with regard to the feasibility of savings for that individual by means of a pension product to which the person or entity providing consultancy has no affinity); and pension marketing (which is carried out through a pension insurance agent or a pension marketing agent, defined as the employee of an institutional entity, with an affinity to the pension products which he or she markets). Pension consultants, including banks, will receive a distribution commission at the rate of up to 0.25% of the assets and will distribute pension products including all products in the sector, which they will be required to adjust to the client's needs. There is a limit on the commission for pension consultants, whereas there is no limit for pension marketers who may receive various commissions. On January 1, 2008, an amendment to the Consultancy and Marketing Law came into effect, allowing pension consultants who are banking corporations to give advice in respect of all long-term savings products – pension funds, provident funds and life insurance and they will receive a uniform distribution commission for this from the institutional entities. Starting from 2006, a new distribution channel (consultants) started operations on a small to negligible scale, but The Phoenix assumes that this channel will capture an increasingly large share of the pension production distribution market in the years to come. On January 1, 2008, the Consultancy and Marketing Law was amended so that small and medium-sized banks could give full pension advice, including life insurance advice at January 1, 2009. According to the Consultancy and Marketing Law and the Supervisor's directives, on January 1, 2009 small-sized banks began providing pension consultation services to the general public regarding insurance-based pension products, while the large banks provided these consultation services only to outlying areas and to self-employed individuals. In April 2009, the large banks began providing pension consultation services around the country to the general public (self-employed and employees). The Phoenix life insurance policies are marketed mainly by agents who receive handling fees and commissions at various rates. The rate of the commission is determined by the type of product, the scope of performance of the agent and the profitability of each agent's insurance portfolio, and according to negotiations with each agent. The commission paid is determined as a percentage of the management fees or the margins on each policy. In addition, for some policies, the commission is derived from a certain percentage of the management fees for the accrual on the policy. Commissions are also paid for the sales activity of the respective agent. The percentage of commissions paid to agents with regard to all kinds of life insurance and long-term insurance mentioned above varies; the commissions are paid monthly, and some commissions are paid as advances during the first year of the lifespan of the policy. There have been changes in life insurance schemes starting on January 1, 2004. These were principally intended to reduce the premium component for coverage of expenses and profit. Reducing the premium component for expenses as set forth above led to a change in the commission agreements with the agents, principally involving a significant reduction in the commissions paid to agents in the first year of the policy and an extension of the period over which the commissions are spread out. As a result, most of

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the commissions and handling fees for new "track" policies are spread out over the lifespan of the policy, on an ongoing basis, as long as the policy remains in force. The insurance agents work with sales managers, who are employed by The Phoenix Insurance in order to provide guidance on sales and solve problems as they arise. In addition, The Phoenix customarily provides loans in various amounts to its agents (irrespective of their commitment to performance). The loans to agents are secured with various collateral. The regulations for investment methods set limits on the granting of loans to agents. The Phoenix Pension's pension funds are usually marketed through agents, and The Phoenix Pension does not have any exclusivity agreements with its agents. The remuneration structure for agents consists of handling fees to a certain percentage of the management fees, and in certain cases a volume-based commission at a variable rate. Following the Bachar legislation, in the period 2006-2008 The Phoenix Pension signed distribution agreement for its products with the following banks: Union Bank, Leumi Bank, Mizrahi-Tefahot Bank, First International Bank of Israel Group, Discount Bank Group. The Phoenix Provident signed distribution agreements for its products with the following banks: Leumi Bank, Union Bank, Mizrahi-Tefahot Bank, First International Bank of Israel Group, Discount Bank Group, and Bank Hapoalim. Provident funds are marketed through agents. The provident funds have not granted exclusivity to any particular agent. Agent commissions in the segment are comprised of a certain percentage of the management fees. Excellence's pension and provident funds' activities are marketed through a number of primary distribution channels: (1) pension marketers for Excellence Nessuah Pension and Provident Funds, through self-initiated contact with potential customers, and mainly by contacting companies and organizations employing a large number of employees; (2) insurance agents and independent marketers; (3) investment consultants and pension consultants in banks, working with those banks that have signed a distribution agreement; (4) advertising through various media. B. Compulsory vehicle insurance 1. General: Compulsory vehicle insurance is required of every vehicle owner, pursuant to the Motor Vehicle Insurance Ordinance (New Version), 5730-1970 (“the Motor Vehicle Insurance Ordinance"), and covers physical harm resulting from the use of a vehicle, to the driver, passengers and/or a third party. The insurance scheme is in line with the provisions of the Motor Vehicle Insurance Ordinance, and the insurance benefits are pursuant to the Road Accident Victims Law, 5735-1975 (“the Road Accident Victims Law"). Pursuant to the Motor Vehicle Insurance Regulations (Establishment and Management of Databases), 5764-2004, a database operator has been established in the compulsory vehicle insurance field, who is responsible for managing the database and producing user reports, inter alia, to assess the risks in the compulsory vehicle insurance sector and determine the pure risk cost on the basis of which the compulsory insurance tariffs are determined. Circulars issued by the Supervisor of Insurance establish various parameters which the insurer may use in setting the tariff, such as engine capacity and driver age, sex and driving experience, and the procedures according to which the insurer is required to act in all matters relating to approval of premium and maximum tariffs which may be collected by the insurer ("Differential Tariff"). The insurance companies have been permitted to use different tariff formulas for vehicle fleets and collectives with approval from the Supervisor of Insurance. The following entities are also active in compulsory vehicle insurance: (a) the "Pool" – the Israeli vehicle insurance pool, which includes Karnit and all of the insurance companies operating in the field. The members of the Pool participate in its losses and profits according to their relative share of the field. The Pool provides insurance to vehicle owners that no commercial insurance company is prepared to insure. The Phoenix's share of the Pool in the 2009 underwriting year was 7.8%, and in the 2010 underwriting year it will increase to 7.9%. (b) Karnit – The Fund for Compensation of Road Accident Victims – a corporation established under the Road Accident Victims Law to pay compensation to road accident victims who are entitled to compensation under the law

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but cannot claim compensation from the insurance companies. Pursuant to the provisions of the Compensation for Road Accident Victims Ordinance (Financing of the Fund) (Amendment), 5763-2003, the insurance companies are required to transfer to Karnit 1% of the risk premiums for compulsory motor vehicle insurance policies which come into effect. Standard policy – In January 2010, the Minister of Finance published the Supervision of Financial Services Regulations (Insurance) (Terms of a Motor Vehicle Insurance Policy) 5770-2010 ("the Regulations"), which replace and annul the Motor Vehicle Insurance Regulations (Insurance Certificates) 5730-1970. The Regulations prescribe minimum mandatory terms for compulsory vehicle insurance (the Standard Policy) and include, inter alia, provisions regarding the form and terms of the insurance certificate including the requirement for special emphasis of those sections detailed in the Regulations and the option to emphasize additional sections. Furthermore, the Regulations state that insurance companies may add an expansion appendix regarding the scope of coverage, but are prohibited from changing the wording of the standard policy or the insurance certificate, or changing the order of the sections in the standard policy. 2. Characteristics of compulsory vehicle insurance: The sector contains one product: insurance cover under the Motor Vehicle Insurance Ordinance for the owner of a vehicle and its driver against any liability which they might incur under the Road Accident Victims Law and any liability which they might incur following bodily harm caused by or as the result of use of the motor vehicle to the driver of the vehicle, passengers therein or pedestrians injured by the vehicle as the result of use thereof. The characteristics include absolute liability of the insurer, limit of compensation, entry of the insurance into force only after full payment of the premium, legal proceedings conducted over a long period of time, uniformity of cover and competition on tariffs, and obligation to insure. As aforesaid, in January 2010 the Supervisor of Insurance published the Supervision of Financial Services Regulations (Insurance) (Terms of a Motor Vehicle Compulsory Insurance Policy) 5770-2010. These regulations prescribe a standard policy for compulsory motor vehicle insurance and the wording of the compulsory insurance for trading in vehicles. 3. Clients: The Phoenix's clients are private clients, business clients, collectives and large vehicle fleets which insure at least 1000 vehicles, or alternatively constitute at least 1% of the premiums in this area. In 2009, the distribution of (gross) insurance premiums paid by The Phoenix's clients was 9.3% by large vehicle fleets and large collectives and Israel Railways and 90.7% by the remaining policyholders (mostly private policyholders), compared with 8% and 92%, respectively, in 2008. 4. Competition: All insurance companies offer compulsory vehicle insurance. As the insurance coverage is uniform and market volume is limited, competition in compulsory vehicle insurance focuses on insurance tariffs, service provided to the policyholders, the percentages of commissions paid by the various companies to their insurance agents, and correct segmentation of the population groups of drivers and pricing of the policies offered to them. According to data from the Ministry of Finance for the first nine months of 2009, The Phoenix's share of the compulsory vehicle sector was in 2009 did not change from its 2008 share (8%) of gross insurance premiums for the sector. The Phoenix is in fourth place after Clal (13%), Harel (13%), and Menorah (13%).

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5. Distribution of residual profit (loss) in the field of compulsory vehicle insurance in 2008 and 2009 (in NIS thousands): Profit (loss) for Adjustments for Activity not Underwriting year underwriting year underwriting years included in Profit (loss) for released in the released in year of released in previous calculation of Total profit / Year of report open years reporting year report 1 years 2 reserves 3 (loss) reported 2009 (7,163) 2006 (998) 33,891 (5,659) 20,071 2008 (6,332) 2005 (46,541) (60,181) (75,559) (188,613)

6. Compulsory insurance – information on underwriting years 2002-2009 (NIS thousands) Open underwriting years Closed underwriting years 2009 2008 2007 2006 2005 2004 2003 2002 Gross premiums4 360,215 321,835 276,046 294,898 333,406 414,891 478,258 478,139 Residual profit (loss) for underwriting year cumulatively until the reporting date5 - (19,234) (20,092) (41,742) 23,493 20,359 55,440 Residual surplus of income over expenses 6 16,555 12,459 - - Effect of income from investment on profit / loss, cumulatively for underwriting year 10,285 27,868 44,769 49,679 45,344 76,123 105,061 106,041

1 The profit for the underwriting year that was released also includes recognition of profit (investment loss), though even discounting the difference in income from investments, a decline is evident in underwriting profitability from 2005 due to reduced prices. 2 The difference between the years in respect of previous years is a direct result of the difference in income (losses) from investments by the Company plus marginal actuarial adjustments of the reserves. 3 Mainly constitutes a difference between the real recognition of income from investments for the open years at a rate of 3% and actual income (losses) from investments for those years. Furthermore, this section includes general and administrative expenses which are non-deductible for the current underwriting year due to supervisory restrictions. 4 The main causes for the changes in the volume of insurance fees for these underwriting years, until 2003, were a gradual increase in the insurance companies' share in the joint insurance with Avner – Motor Vehicle Accident Victims Insurance Association Ltd. ("Avner") from 30% in 1997 to 100% in 2003 (when Avner ceased the issue of new policies as a joint insurer). The decline from 2004 onwards is due to price reductions in the sector and the cessation of transactions with collectives and vehicle fleets. 5 The 2005 and 2006 underwriting years were released in 2008 and 2009, respectively, with losses due partly to losses on investments, as well as to large-scale claims which occurred in these underwriting years, compared to a profit for 2002 through 2004, which was released in the previous years. In the 2005 - 2007 underwriting years, residual losses were recorded due to extra-ordinary claims which occurred in these years, following the reduction of prices which took place from mid-2003, and as investment profits have yet to accumulate, which profits are the main factors in the profitability of long-term sectors. Following the adoption of the IFRSs, since 2007, a 3% real yield has been charged to the open years with no reliance on the actual yield. In the closed years actual investment income was charged. The cumulative result includes results calculated on the basis of Israeli GAAP until the end of 2006 and results calculated on the basis of IFRSs in 2007-2009.

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C. Property vehicle insurance 1. General: Vehicle insurance (known as CASCO or comprehensive insurance) is the most common optional insurance within the field of general insurance. Property vehicle insurance includes cover for property damage to the insured vehicle (“Comprehensive Insurance”) and for property damage caused by the insured vehicle to third parties (“Third Party Insurance”). 2. Characteristics of property vehicle insurance: The Phoenix markets property vehicle insurance which covers property damage caused to the insured vehicle and property damage caused by the insured’s vehicle to a third party. Property vehicle insurance is optional insurance. The insurance policy for a private vehicle and a commercial vehicle weighing up to 4 tons is based on the terms of the standard policy which are determined in the Supervision Regulations of Insurance Businesses (Terms of a Private Vehicle Insurance Contract) 5746-1986. The wording of the standard policy is binding and it is possible only to improve its terms and add expansions in respect of the scope of cover, risks, property and liabilities of policyholders. The property vehicle insurance tariff is a differential actuarial tariff (variable and risk-adjusted) which is subject to approval from the Supervisor of Insurance. This tariff is determined on the basis of a number of parameters which include, among others: model of vehicle, engine capacity, year of manufacture, protection type, number of drivers, sex and age of the drivers, experience, and previous claims. The Phoenix Insurance offers property vehicle insurance policies which include full comprehensive cover, comprehensive cover excluding self-damage (cover for property damage caused to a third party only), comprehensive cover excluding self-damage in the event of an accident and comprehensive cover self-damage in the event of theft. Moreover, The Phoenix offers various expanded insurances such as cover for earthquake risks, riots and strikes, as well as ancillary services such as towing, replacement vehicle in case of accident or theft, and glass breakage insurance. The property vehicle insurance tariff is a controlled tariff and is adjusted from time to time. The Phoenix also offers a variety of types of insurance for commercial vehicles weighing more than 4 tons, at terms which are customary in Israel and at tariffs which are reviewed periodically. The size of the potential market is limited to the number of vehicles in Israel and so the market is relatively stable and the competition focuses on reducing tariffs and improving service as a result of the intensifying competition. The sector is also characterized by the short period of time taken to complete handling of claims. 3. Clients: Most of The Phoenix's clients are private clients and business clients (99.9%). The remaining 0.1% of The Phoenix's gross insurance premiums in 2009 came from large vehicle fleets and collectives (including 1,000 vehicles at least or alternatively accounting for at least 1% of the premiums in this sector). The comparative figures in 2008 were 99.5% and 0.5%, respectively. 4. Competition: The property vehicle insurance sector is characterized by fierce competition which is reflected mainly in the reduction of tariffs and the granting of special reductions. The competition is principally focused on insurance tariffs, service, the percentages of commissions paid by the various companies to their insurance agents, and correct segmentation of the population groups of drivers and pricing of the policies offered to them. The Phoenix focuses on increasing its market share while maintaining its current profit margins. The primary means of achieving this goal are targeted marketing and attracting preferred policyholders. According to data from the Ministry of Finance, in the first nine months of 2009, The Phoenix’s market share is 10% (fourth place in the sector), as it was in 2008, after Harel (16%), Menorah (15%) and Clal (12%). 5. Financial data for products and services in the property vehicle segment in 2008 – 2009: 2009 2008 Gross premiums 594,973 576,659 Premiums less reinsurance (residual) 594,987 576,663 Gross claims 387,790 391,249 Residual claims 383,243 391,460

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D. Other general insurance 1. General: Other general insurance includes a wide range of insurance cover, which may be divided into three principal sectors: Property insurance: Property insurance provides coverage against loss or physical damage to property owned by the policyholder or for which he is responsible. It includes insurance for residences, business premises, engineering and shipping. The principal risks covered by property insurance policies are fire, explosion, and an option for additional coverage against burglary, earthquake and natural disasters. Property insurance includes coverage for direct damages to the policyholder's property caused by the realization of those risks set forth in the policy, and coverage for indirect damages. Generally speaking, the term of the policy is one year, with a limitation period of three years from the entitling event. Claims against property insurance policies are clarified shortly after the occurrence of the insurance event (and so this sector is considered as having a "short claims tail"). In light of that set forth above, in the property insurance sectors, the insurance premium in its entirety is recorded as income when the policy is issued, and the relative share of the premium received in respect of the period after the date of the financial statements is credited to the reserve for risks which have not yet elapsed. Profit or loss on investment of the reserve monies is immediately recorded in the income statement. Liability insurance: In the case of liability insurance, the insurer indemnifies policyholders for their financial liability towards third parties prescribed by law, up to the limit of liability stated in the policy. Liability insurance includes third-party liability insurance, employers' liability insurance, professional liability insurance (including directors' and officers' liability insurance) and product liability insurance. The limitation period in liability policies does not end so long as the third party's claim against the policyholder remains valid. In general, the term of the policy is one year, but in light of the long period of time which passes from the date of the incident, and the formulation and filing of the claim, as well as the length of time required for factual and legal clarification of the claim, this sector is considered as having a "long claims tail". Therefore, the profits from the underwriting year ended are kept in an additional reserve for several years, until most of the claims have been investigated. The profit is released and transferred to the income statement only at the end of the aforesaid period of time. In some types of liability insurance (primarily third-party liability insurance and employers' liability insurance), the cover is on a per-event basis. In other words, cover is given to events which occurred during the term of the insurance, and the claim may be filed after the term of the insurance has expired, subject to the statute of limitations. In other types of liability insurance (primarily professional liability insurance, product liability insurance, directors' and officeholders' liability insurance), the cover is based on the date the claim is filed. In other words, cover is given to claims which were initially filed during the term of the insurance, even if the grounds for these claims arose prior to the term of the insurance, but after the date prescribed in the policy. Other insurance: This category includes types of insurance cover which are not property or liability insurance, such as personal accident insurance (which covers death or permanent full or partial disability resulting from an accident and/or temporary work disability resulting from an accident or illness) or contractor work insurance. The scope of activity in the field of other general insurance is related to factors such as the frequency of the event insured (for example: increase in the number of burglaries of business premises or residential properties), the economic situation of the potential policyholders, their willingness to take out insurance policies, as against other means of managing and reducing risks, and the overall scope of economic activity in Israel. Insurance policies in this field often provide insurance packages ("umbrella" insurance) which include various types of cover – both property and liability insurance. 2. Clients: In 2009, most of The Phoenix's clients in the other general insurance sector were private policyholders and business clients (97.2%). The remaining 2.8% of the gross insurance premiums come from large policyholders. The comparative figures in 2008 were 95.4% and 4.6%.

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3. Financial data of "other general insurance" products for 2008-2009, broken down by sectors (in NIS millions): Property insurance 2009 2008 Gross premiums 507,443 497,191 Premium less reinsurance (residual) 229,925 230,241 Gross claims 264,277 226,965 Residual claims 102,516 107,347

Liability insurance 2009 2008 Gross premiums 332,947 248,590 Premium less reinsurance (residual) 240,610 192,422 Gross claims 209,226 189,758 Residual claims 205,900 185,218

Other insurance 2009 2008 Gross premiums 35,639 44,063 Premium less reinsurance (residual) 16,818 19,428 Gross claims 26,798 29,521 Residual claims 9,737 10,602

4. Competition: The general insurance sector is characterized by fierce competition which is reflected in the adaptation of the insurance policies to clients' needs, entry into specific insurance niches, reduction of tariffs and special discounts. The Phoenix’s competitors in the general insurance sector are most of the insurance companies as well as insurance companies marketing policies directly to private clients. According to data from the Ministry of Finance for the first nine months of 2009, The Phoenix is in third place in this field, with 12% (similar to 2008) after Clal (22%) and Harel (20%). E. Health insurance 1. General: Health insurance policies are intended to indemnify or compensate policyholders for medical expenses in cases of harm to their health. These policies include cover for transplant expenses, medication which is not subsidized by the state, private medicine and hospitalization expenses. Moreover, the health insurance sector includes nursing care insurance, insurance for serious diseases, dental insurance, sickness insurance, travel insurance, insurance for Israelis overseas and insurance for foreign workers living in Israel. Health insurance in Israel is divided into three layers according to the insurance provider and the scope of the insurance coverage (basic layer - state-subsidized health services; second layer - additional health services; third layer - private health insurance). The health insurance market is a developing market, which is a part of the total national expenditure on health in Israel, and the percentage of persons purchasing private insurance policies is constantly increasing. The Phoenix markets a range of insurance plans which are updated in accordance with the rate of technological progress and medical treatments in Israel and worldwide. The health insurance policies marketed by The Phoenix are under the "Health Line" brand. The Phoenix also operates a customer relations center which handles enquiries from policyholders and answers questions regarding the various insurance plans. According to Ministry of Finance data, in the first nine months of 2009, there was a 17% increase in gross insurance premiums in the health insurance sector compared with the corresponding period in 2008. This compares with an 13% increase in 2008 over 2007. Premiums for The Phoenix Insurance’s health insurance activities increased in 2009, amounting to NIS 1,031.5 million compared with NIS 870.3 million in the corresponding

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period of the previous year, an increase of 18.5%. The increase is due mainly to marketing efforts of insurance to the business sector, as well as an increase in private policyholders, including policies granting medical coverage to persons staying abroad for prolonged period of time. There is also an increasing trend for organizations to insure their employees with collective health insurance. This trend is turning collective insurance into an increasingly significant factor in the health insurance sector. In light of this trend, the share of sales of collective insurance out of total sales of general health insurance (individual and collective) is growing. This leads, inter alia, to an erosion of the margins in policies in this sector. Activity in health insurance, similar to other fields of insurance, is subject to the legal provisions which apply to insurers and the directives from the Supervisor of Insurance. The trend in regulation in recent years has been toward standardization of the basic terms of the insurance policy and increased transparency in the terms of insurance policies. 2. Principal products: The Phoenix markets health insurance, illness and hospitalization insurance, nursing care insurance and increased dignity nursing care insurance at a variable premium, chronic illness insurance, dental insurance, travel insurance and travel abroad insurance, insurance for foreign workers living abroad, sick day insurance, insurance for Israelis overseas and "riders" (policies covering non-subsidized medicines and food supplements).. Health insurance includes compensation or indemnification for expenses related to surgery, transplants and/or special treatments in other countries, cover for drugs which are not included in the State "health basket", alternative treatments, compensation for serious diseases, medical services using advanced technologies, ambulatory medical services, etc., all according to the insurance schemes purchased for or by the policyholders. Supplementary products are added to the insurance schemes which offer a wide range of options for expanding the insurance cover in accordance with the needs of the policyholder. As set forth above, health insurance products may be divided into three tiers of cover: cover which constitutes an alternative to the State-subsidized health services and provides coverage from the first shekel expended; coverage for services which are not included in the basic state subsidy program and which come under additional health services; coverage beyond that given by the state-subsidized health services. 3. Clients: Health, illness and hospitalization insurance clients may be divided into three principal groups: private policyholders who purchased individual "Health Line" policies (generally for their entire lives); group insurance for employees and families and employees, unions and major companies in Israel; members of Israel's HMOs who purchase cover for additional health services. In 2009, the distribution of premiums was as follows: 38% from private clients; 42% from group insurance clients; and 20% from members of Israel's HMOs, compared with 41%, 38% and 21%, respectively, in 2009. The Meuhedet HMO purchased nursing care insurance from The Phoenix, in the form of group insurance which constitutes a supplement to the "health basket" and is periodically renewed. In 2006, the insurance agreement was renewed for seven more years, until March 31, 2013. In February 2007, The Phoenix was awarded the tender for insurance of medication not covered by the Maccabi HMO for additional health services policyholders. This activity will end on March 31, 2010. 4. Competition: The dominant insurance group in the field of health insurance is Harel. At September 30, 2009, Harel held 28% of that market. This market share is due, inter alia, from Harel's holding of 65% of Dikla Insurance Co. Ltd., which provides group and nursing care insurance for the members of the Clalit Health Services HMO. The other main competitors in this area are Clal, Migdal and Menorah and the supplementary service programs of Israel's HMOs. The Phoenix has increased its market share in recent years and is currently positioned in second place. According to data from the Ministry of Finance for the first nine months of 2009, The Phoenix is in second place in this field together with Clal, from the standpoint of gross insurance premiums, with 21% (similar to its figures for 2008 and 2007) after Harel (40%) and before Midgal (8%). The insurance companies are attempting to expand their circle of clients and penetrate new areas of the market through direct offers of private health insurance or cooperative ventures with the HMOs, in order to provide their members with insurance for additional health services. In the second half of 2006, a number of HMOs began, for the first time, to

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purchase “third tier” insurance for their members, including cover for drugs, surgery and various medical services which were previously provided by the insurance companies. The impact of this action by the HMOs on private insurance policies in Israel and the private insurance market in Israel is not certain; however, The Phoenix estimates that it will have the effect of raising public awareness of the necessity for private medical insurance. The Phoenix copes with competition in the field by pricing its products properly, taking into account, among other things, distribution and sales commissions, operating costs, cost of risk, the existence of high-quality information concerning risks on the basis of past experience and the successful analysis thereof, use of reinsurance contracts for the transfer of risks, and aggressive marketing. In 2009, The Phoenix launched two new health insurance products – Nursing Care 360 (life-long private nursing care insurance) and individual personal accident insurance. 5. Financial data of other general insurance products for 2008-2009, broken down by sectors (NIS millions): 2009 2008 Gross premiums 870,295 1,031,569 Premiums less reinsurance (residual) 712,853 832,096 Gross claims 579,846 741,641 Residual claims 452,759 577,978

F. Financial services 1. General The Phoenix operates in the financial services segment through Excellence, 65.89% of whose shares are held by The Phoenix as of the report date1. Excellence is a public company and its shares are listed for trading on the TASE. Excellence, through companies under its control (jointly: "Excellence"), is involved in a variety of activities in the capital market. The company’s principal fields of activities are marketing and management of investments, underwriting and investment banking, issuing of structured products, issuing of financial products, and provision of stock exchange and trading services. In addition, Excellence is engaged in the management of provident and pension funds as detailed in section 1.12.3(A) above. A) Investment marketing and portfolio management for clients – This field includes the following Excellence activities: Marketing and investment management services in Israel and abroad; management of trust funds; provision of marketing services for investments and non-marketable derivative instruments. Investment marketing and management operations are carried out through Excellence Nessuah Investment Management, which is licensed to manage and market investments under the Consultation and Marketing Law. In addition, some of the portfolio management activities are carried out through a strategic partner Invesco Asset Management Ltd. Trust fund management operations are carried out through Excellence Nessuah Trust Fund Management utilizing the majority of available investment channels. On June 9, 2009, Excellence and the companies under its control finalized their agreement with Prisma Investment House Ltd. ("Prisma") to acquire Prisma’s trust fund, index-linked certificates and portfolio management operations. Under this agreement, Excellence acquired Prisma's trust funds, which as of the contract date bear a financial debt to banks totaling NIS 130 million, in return for an allocation of shares to Prisma constituting 45% of the issued and paid-in capital of an Excellence investee company. Prisma will sell the allocated shares to Excellence in 2014-2017 at such rates as prescribed in the agreement and for such consideration as will be

1 Regarding the Excellence transaction, in which The Phoenix will purchase a further 20% of Excellence's share capital, see Note 14 to the financial statements.

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calculated according to the formula prescribed in the agreement. Furthermore, Prisma will retain a capital note of NIS 78 million, for which it shall receive payments according to a formula set forth in the agreement. In addition, Excellence acquired Prisma's index—linked certificates and financial instruments companies, for a sum equal to the equity of the acquired companies plus NIS 7 million. Starting from June 10, 2009, upon completion of the transaction, Excellence, which until June 9, 2009 managed 36 trust funds in the majority of investment channels available, manages 124 trust funds through Excellence Trust Funds (formerly Prisma Trust Funds Ltd.). B) Underwriting and investment banking – Excellence, through Excellence Nessuah Underwriting (1993) Ltd., provides services in underwriting, management, consultancy and distribution for public and private offerings in Israel. The company engages in securities transactions (including offers of sale) and distribution of securities, brokerage and consultancy in securities transactions. Excellence also takes part in the management of IPOs and serves as manager of an underwriter or distributor consortium and/or as an underwriter or distributor, as applicable. C) Issue of structured products – Beginning in 2002, Excellence is involved in the issue of negotiable structured securities on the TASE. All structured securities were issued through a private company whose shares are not listed and shall not be listed for trade on the TASE and the company’s sole activity is the issue of bonds and dealing with assets mortgaged in favor of those holding the bonds (in this section; "the Issuing Companies"). The issuing companies are controlled by Excellence and are special purpose companies (SPCs) established for the issuing of bonds, and which are prohibited from undertaking any other activity. D) Issue of financial instruments – Excellence, through a number of KSM companies, is involved in the issue of and trading in index-linked certificates, composite certificates, short certificates, commodity certificates and coverage options for the public. Each of the series of index-linked certificates was issued through a company with just one commercial activity – the issuing of index-linked certificates and dealing with assets mortgaged in favor of those holding the certificates. The KSM companies specialize in the management of index-linked products. Excellence began issuing certificates of deposit in 2004, through KSM Jambo, Paz Foreign Deposit Ltd., Paz Foreign Deposit 2 Ltd. and KSM Currencies Ltd. All certificates of deposit are issued through a company with just one commercial activity – the issuing of certificates of deposit and dealing with assets mortgaged in favor of those holding the certificates of deposit. Certificates of deposit are linked to the rate of exchange for a variety of currencies against the Israeli shekel and bear interest, except for KSM Jumbo whose deposit certificate bears an in interest linked to the Bank of Israel interest rate and which is not linked to any foreign currency exchange rate. Each of the certificate of deposit companies is a special purpose company (SPC), established in order to execute the issue of certificates of deposit. E) Brokerage and trading services – Excellence, through a TASE member company, is involved in marketing and investment services and brokerage services (trading in securities and derivatives) for local and foreign customers in Israel and abroad. Excellence specializes in all trade channels including shares, bonds in Israel, bonds abroad, derivatives, foreign securities, issues and distributions. Excellence's market making operations for primary dealer bonds will cease on April 15, 2009. Excellence Nessuah Brokerage Services Ltd. ("Excellence Nessuah Brokerage" or “the TASE Member”) is licensed to market investments pursuant to the Consultancy Law and it has been a member of the stock exchange since August 1978. The TASE Member provides services in investment marketing and securities trading on the TASE and in overseas markets and market making in shares and government bonds for local and foreign clients. Details of the Excellence's revenue, by field of activities, the costs attributed to each field of activity and the operating profit from each field, at December 31, 2008 and 2009 (in NIS millions) 1 :

1 Data taken from Excellence's financial statements and include its pension and provident fund operations.

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Investment TASE and trading Issue of structured Provident and underwriting and Investment Issue of financial services products pension funds banking management1 products December December December December December December December December December December December December 31, 2009 31, 2008 31, 2009 31, 2008 31, 2009 31, 2008 31, 2009 31, 2008 31, 2009 31, 2008 31, 2009 31, 2008 Total revenue 63 61 34 41 222 243 9 6 137 88 77 111 Costs Variable costs that are not revenue in another sector 5 5 3 8 36 36 2 2 36 12 11 15 Fixed costs that are not revenues in another sector 27 31 11 8 101 103 3 3 65 45 37 31 Total costs 32 36 14 16 137 139 5 5 101 57 48 46 Operating profit 31 25 20 25 85 104 4 1 36 31 29 65 Total assets 383 371 1,439 2,243 449 411 11 15 418 69 15,755 9,073 Minority interest in sector revenues - - 28 - - - - - 2 - 3 7

In 2008 and 2009, Excellence’s total assets amounted to NIS 12,326 million and NIS 18,598 million, respectively. Total liabilities amounted to NIS 11,845 million and NIS 18,038 million respectively. Turnover amounted to NIS 542 million and NIS 547 million, respectively. Gross profit amounted to NIS 231 million and NIS 206 million, respectively, and net profit amounted to NIS 125 million and NIS 129 million, respectively. The volume of assets managed by Excellence is influenced, inter alia, by changes in capital market indices in Israel and abroad, and from exchange rates to which some of the series issued by the special purpose companies are linked.

1 From the first quarter of 2008 and as a result of the application by Excellence of IFRS 8, investment management operations were split so that subsequent to the split, Excellence reports its provident fund and pension fund operations separately.

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2. Limitations, legislation, standardization and special constraints Excellence's operations in various areas in the capital market are subject to comprehensive regulation. The trust fund management segment is regulated under the provisions of the Joint Investments Trust Law and regulations made thereunder. In November, the Israel Securities Authority general assembly approved a draft version for the Joint Investments in Trust Law, 5754-1994 (Amendment No. 14), 5770-2010 for public review ("the Amendment"). The highlights of this draft amendment are regulation of the index-linked certificates segment in a manner similar to the current regulation for trust funds, with adaptations to the unique characteristics of the index-linked certificates segment. Furthermore, the Amendment provides for the launch of a new financial vehicle, the "index-linked fund" – a tracking fund (a fund whose investment policy is intended to track changes to the index or to the value of an underlying asset), whose units will be listed for trade on the TASE, and will be available for purchase only during the course of trading. The underwriting and investment banking segment is regulated under the Securities Law, and the regulations made thereunder. Supervision of organizations operating in these segments, and the enforcement of regulation, are carried out by the Israel Securities Authority. Operations in the structured bonds segment are subject to the provisions of the Securities Law and the regulations made thereunder. Furthermore, each of the "Haharim" companies, which carry out issuings of structured vehicles, has signed a trust deed with a trustee for the bonds, which prescribes various provisions; operations in the index-linked certificates and deposit certificates are subject to the Companies Law, the Securities Law and the regulations made thereunder, and the directives issued by the TASE; the main laws which apply to the trade and brokerage services segment are the provisions of the Consultation Law, as these apply to marketers of investments, and the provisions of the Prohibition on Money Laundering Law and the Prohibition on Money Laundering Order (duty of identification, reporting, and maintaining records of a TASE member), 5762-2001. The TASE member operates according to the TASE members' statute, and is subject to supervision by the TASE; The provisions of the Provident Funds Law, the Supervision Regulations, and the Provident Funds Management Regulations apply to the provident fund segment. Provident funds are subject to supervision by the Supervisor of Capital Markets, Insurance and Savings in the Ministry of Finance. In addition to these laws, various reforms and legislative amendments that have taken place in recent years affect Excellence's operations. The Bachar reform, which is described in detail in section 1.12.2(D) above, has led to material changes in the capital market, including changes in the structure of ownership in the capital market, and to reforms in all matters related to consultation and marketing of financial and pension-related products and trust funds. In 2007 and 2008, the TASE enacted changes in the TASE statute, which affected the structured products and financial instruments segments. Furthermore, in July 2007, a reform was carried out in the underwriting segment, with a number of regulations coming into effect which were passed under Amendment No. 24 to the Securities Law. These mainly dealt with changes to the method of underwriting and the manner of offering securities in Israel. 3. Changes in the scope of operations and profitability of the segment Excellence operates in various segments in the local capital market, which are characterized by high volatility, inter alia due to the effect of political, security-related and economic factors in Israel and abroad, which are outside of Excellence's control. Inter alia, this volatility affects the scope of the public's activity in the capital market, and the prices of securities and financial products. In light of the market's emergence from the global economic crisis of 2008, the economic recovery of 2009, and the recovering markets, the volume of assets managed by Excellence grew, as did the scope of its operations, mainly in the underwriting and asset management segments. As of December 31, 2009, total assets managed by Excellence amounted to NIS 55 billion, as compared to NIS 32.3 billion on December 31, 2008. On the other hand, 2009 was characterized by mergers and acquisitions between financial entities in general and between investment houses in particular. In light of the above, Excellence acquired Prisma Investment House Ltd.'s funds company. In the investment marketing and management segment, 2009 brought positive changes in the performance of the various indices (government bonds, corporate bonds, and shares), which entailed significant improvements in the performance of the investment portfolios, which recorded positive yields. Market corrections brought customers back to

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the capital markets through managed portfolios and through the various distribution channels. The investment banking and underwriting segment showed signs of recovery from the end of the first half of 2009. The slowdown in trade volumes on the TASE accelerated in the second half of 2009, and was accompanies by sharp gains. Accordingly, since the end of Q2/2009, there has been an increase in Excellence's scope of operations and revenues in the underwriting segment which corresponds to the increased number of issuings and the volume of capital raising carried out in Israel. Following the exacerbation of the financial crisis during 2008, the exposure of the special purpose companies increased in the structured products segment, due to risks of dependents on proceeds from notes as a sole source of financing; lack of collateral for liabilities of the notes issuers; subordination to early redemption rights of the notes issuers; and applicability of foreign law. The scope of operations in the financial instrument issuing segment is derived from the condition of the capital market, the range of issued instruments, the awareness of the investing public and the marketers of financial instruments, the issuing rate and the volume of investment, and changes in public preferences as regards investments specializing in overseas markets, commodities and financial derivatives. Operations in the trade and brokerage services segment are also influenced by the capital market conditions. The crisis on the financial markets in 2008 brought a decline in the volume of trade in securities through the TASE member. However, the recovery in the financial markets that occurred in 2009 increased the value of these securities. 4. Customers Customers in the trust funds, structured products and financial products segments are the general public. Structured products which are not listed for trade on the TASE are sold mainly to institutional customers. Customers in the portfolio management segment include both institutional and private customers. Customers in the investment banking and underwriting segment are mainly private and public companies seeking to raise capital or offer securities to the public. Customers in the trade and brokerage services segment are mainly institutional entities in Israel and abroad, as well as customers whose moneys are managed by portfolio managers. 5. Marketing and distribution In the investment marketing and management segment, portfolios are marketed through Company employees, a distributor network of independent agents, and a telemarketing mechanism which recruits customers through self-initiated telephone calls. Trust funds are marketed mainly to investment consultants in the various banks, as well as through advertising on the various media. The structured and financial instrument issuings segment is subject to advertising restrictions as issuings are made according to a prospectus. Marketing efforts in this segment are concentrated immediately prior to issuing, and include presentations to institutional entities, to investment consultants and to portfolio managers. Investment banking and underwriting operations are marketed through Excellence employees, and targets the management of large-scale enterprises and the managers of their finances. Operations in the trade and brokerage services segment are marketed mainly by Company employees, as well as through independent agents who are entitled to commissions for customers recruited. 6. Competition The following is a short description of the competition in Excellence's segments of operation: Investment management and marketing – There are numerous organizations in Israel specializing in portfolio management and in the provision of investment marketing services. In recent years, there has been a significant increase in the number of organizations operating in this market, which has increased competition. Clal Finance, Peilim Capital Markets, Psagot, IBI, Meitav – Gaon, and Migdal Capital markets are portfolio managers which Excellence estimates to be its main competitors in the portfolio management segment. Excellence estimates that it is among the leading companies in the portfolio management segment in Israel. In the trust fund management segment, increased enforcement of the Consultation Law in the banking system, as well as the

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public and legislative process that accompanies the Bachar reform, have improved the relative position of the private fund managers, as well as their market share. Excellence estimates that its main competitors in the trust funds segment are primarily those companies which were formerly controlled by the banks, such as Psagot Mutual Funds, Harel-PIA Trust Funds, Menorah Mivtahim Mutual Funds, DS Mutual Funds, and privately-owned companies (which were not controlled by the banks) including Meitav, Clal Finance, Migdal Capital Markets, IBI, Analyst, Altshuler-Shaham, Epsilon and others. Issue of structured products – Competition comes from other investment houses, and from banks offering similar products through structured deposits. Excellence estimates that there are 5 other organizations which have issued structured bonds traded on the TASE, led by Clal Finance Underwriting, Global Finance and Expert. To the best of Excellence's knowledge, it is the largest player in the structured products market. Issue of financial products – Excellence estimates that there are 6 other organizations which have issued index-linked certificates to the public, led by Clal Finance, Tahlit, Psagot, Index and Harel. Excellence estimates that it is the largest player in the index- linked certificates segment, with a market share of approximately 33.3%. Underwriting – In the underwriting segment, there are currently three dominant players (Clal Finance and Underwriting, Poalim IBI Underwriting and Issuing, and Leader Issuances), approximately three or four mid-size issuing managers (including Excellence), and other smaller organizations. Trade and brokerage services – Competitors are TASE members, some of whom are banking corporations in Israel and abroad, and others who are not banking corporations. Competition focuses on commissions, quality and diversification of services provided to customers. 1.12.4 Customers There are many and diverse customers in the insurance industry. No single insurance customer provides The Phoenix with 10% or more of the Company’s total income. For a description of the typical customer in each field of insurance, see above. 1.12.5 Marketing and distribution In the insurance industry, most marketing and distribution is performed by insurance agents and agencies. Most insurance agents work with a number of insurance companies in order to provide solutions for the wide range of their customers’ needs and they do not work exclusively with a single insurance company. When choosing the insurance company they intend to work with, the main parameters considered by the agents are the rates of commissions, the quality of service provided by the insurance company and the interest insurance products generate in the agent’s customers. The insurance company’s principal considerations when choosing agents to represent them are the agent’s fields of activities, specialties and relative advantages, the potential for commercial cooperation with the insurance company; rates of commission and the agent’s customer base. As part of the Bachar reforms, new legislation on counseling and marketing was introduced and beginning in February 2006, it regulates all involvement in pension counseling and marketing. For further details, see sections 1.12.2(D) above and 1.12.17(B) below. The vast majority of insurance policies sold by The Phoenix Insurance are marketed through agents, most of which also market policies issued by other insurance companies. Insurance agents work directly with The Phoenix’s insurance clusters and some have been granted the authority to issue policies in accordance with The Phoenix’s tariffs and authorizations. The Phoenix Insurance also works through pension arrangement agencies and agencies employing sub-agents. As a rule, these agencies work with a number of insurance companies. The Phoenix grants such agencies issuing and underwriting authority at different levels. In most cases, when The Phoenix Insurance signs an agreement with an agency working with sub-agents, The Phoenix Insurance also signs agreements with the sub-agents operating through the agency. The Phoenix also operates an internet website which enables users to purchase automobile insurance (compulsory and property), travel insurance, and receive personalized and marketing information. Furthermore, The Phoenix operates a customer service call center. The Phoenix Insurance owns a number of insurance agencies. As is standard practice in the insurance industry, these agencies do not work exclusively with The Phoenix Insurance and work with a number of different insurance companies. In recent years, The Phoenix Insurance has

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focused on the purchase of agencies engaging in pensions, on the background of the changes in the long-term savings sector. The Phoenix Insurance contracts agents through basic commissions agreements, in which agents are rewarded according to premium volumes for policies marketed on behalf of The Phoenix Insurance, according to the various insurance sectors. Commission rates are determined according to the type of product, the agent's performance, and the profitability of each agent's insurance portfolio. Commission rates are also partly determined through negotiation with each agent. 1.12.6 Seasonality Seasonality has no material effect on profitability in any of The Phoenix's sectors of activity. In the general insurance industry, seasonality in the premium payment cycle throughout the year is affected in the first quarter which is the prominent quarter because most policies are renewed at the beginning of the year. Seasonality in the premium payment cycles is neutralized by the reserve mechanism for risks that have not yet elapsed and therefore does not cause volatility in the data regarding premiums earned. The following table provides details of the general insurance premiums received in each quarter in the period 2008-2009: These details indicate that seasonality is not discernible in the premium cycles. 2009 2008 NIS thousands % NIS thousands % 1st quarter 436,797 24.9 406,539 24.6 2nd quarter 432,654 24.7 408,009 24.7 3rd quarter 436,039 24.8 416,548 25.3 4th quarter 449,073 25.6 418,518 25.4 Total 1,754,563 100 1,649,614 100

The following table provides details of seasonality in health insurance. These details indicate that seasonality does not affect the health insurance sector. Premiums in health insurance by quarter: 2009 2008 NIS thousands % NIS thousands % 1st quarter 236,586 23.1 203,790 23.5 2nd quarter 250,608 24.6 209,221 24.1 3rd quarter 262,859 25.8 216,529 25.0 4th quarter 270,311 26.5 237,030 27.4 Total 1,020,364 100.0 866,570 100.0

In the life insurance sector, revenue from premiums are not characterized by seasonality, However, as the provisions for life insurance benefit from tax benefits, a substantial part of the new sales is made at the end of the year. The following table provides details of the life insurance premiums received in each quarter in the period 2008-2009: 2009 2008 NIS thousands % NIS thousands % 1st quarter 663,218 25.1 638,723 24.2 2nd quarter 642,459 24.3 646,341 24.5 3rd quarter 647,923 24.5 670,685 25.4 4th quarter 693,097 26.2 682,151 25.9 Total 2,646,697 100.0 2,637,900 100.0

1.12.7 Reinsurance The Phoenix takes out reinsurance to spread the insurance risks taken on by the Company. The Phoenix reinsurers have an influence on insurance capacity, policy conditions, tariffs and profitability. Insurance companies insure some of their transactions through reinsurance, mainly for general insurance, through reinsurers abroad. Notwithstanding the aforesaid, reinsurance agreements do not derogate from the contractual rights accruing to the insurance company’s

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policyholders and do not absolve the insurance company from any liability towards policyholders. Therefore, the stability of the reinsurers has an effect on the insurance company. Moreover, conditions to agreements made with reinsurers affect the insurance company’s profits. A possible deterioration in the position of the reinsurance market is likely to have a number of consequences: First, an insurance company which enters into a reinsurance agreement is directly exposed to the reinsurer’s ability to comply with its commitments if an insurance event occurs. Second, a deterioration in the robustness of a reinsurer is likely to cause the insurance company to request that it be replaced with another reinsurer. This entails the addition of costs to the original reinsurance costs and the risk that the original terms of cover will not be achieved, which in turn leads to the recording of an accounting loss because of a suspicion that the reinsurer will be unable to meet its obligations. Third, a deterioration in the position of the reinsurance market is liable to lead to a decline in reinsurance capacity which harms the insurer’s ability to conduct its insurance business, and a rise in reinsurance tariffs and other agreements terms with the reinsurer, thereby causing additional costs or harming the quality of the insurance cover. In addition to the aforesaid, an absence of the reinsurance required by an insurance company is liable to cause a failure in its ability to comply with its regulatory capital requirements. 2009 was characterized by a relatively low number of significant natural disasters. Improved conditions in capital markets worldwide and the growth in revenues from investments in the past year have improved the profitability of reinsurers and increased their capital capacity. Since 2002, The Phoenix Insurance signs agreements with reinsurers graded A- and above, as rated by one of two rating companies – Standard and Poor’s and AM Best. It is noted that these ratings are the sole parameter used when checking the stability of a reinsurer. The reinsurer market at the ratings relevant to The Phoenix Insurance includes more than 200 insurance companies. The Phoenix Insurance regularly works with approximately 60 reinsurers. For further details about The Phoenix's largest reinsurers, see Note 29 to the financial statements. In general, the reinsurance rate in the life insurance sector is significantly lower than the reinsurance rate in the general insurance sector. This is due, inter alia, to the majority of insurance premiums in the life insurance sector including a savings component, for which there is no reinsurance. In the general insurance sector there is also variability in the scope of reinsurance acquired, with reinsurance being less prevalent in sectors characterized by high-dispersion homogenous risks (e.g. – the vehicle sectors - compulsory and property), and more prevalent in sectors characterized by high variance, low dispersion and large-scale risks (e.g. – other property insurance). Contracts are through various types of reinsurance 1 . Reinsurance contracts for the general insurance sector (excluding health insurance) are usually made on an annual basis. Reinsurance contracts in the life, health and nursing care insurance sectors are usually made for a set period and apply for the entire lifespan of the covered policies issued during that period. In the life insurance sector, The Phoenix Insurance engages various reinsurers through relative reinsurance contracts, both for compulsory insurance and for optional insurances, for protection of the risk component in the life insurance portfolio only. Starting from mid-2005, a non-relative reinsurance contract is purchased, which protects from physical injuries, loss of life and disability due to catastrophic events. In the compulsory and property vehicle insurance sectors, The Phoenix Insurance undertakes "excess of loss" reinsurance contracts. In the general insurance sectors, The Phoenix Insurance undertakes the following types of reinsurance contracts: relative, excess of loss, and quota. In the health insurance sectors, The Phoenix Insurance undertakes quota-type relative reinsurance contracts, for protecting the risk components in the health insurance portfolio. A

1 Contractual reinsurance, made between the insurance company and the reinsurer, is made according to a reinsurance agreement under which the reinsurer, according to certain prescribed terms, assumes all the risks/ businesses transferred to it by the direct insurer without need to approve each risk/ business separately. Contractual reinsurance is divided into relative reinsurance, in which the division between the assumption of risks (claims coverage) and the premium is identical, and non-relative reinsurance, in which the assumption of risk (claims coverage) by the reinsurer is not directly correlated to its share in the premium. Relative reinsurance is sub-divided into quota share contracts, in which the reinsurer undertakes coverage at a fixed portion of each claim in a certain segment for an identical fixed portion of the premium, and surplus contracts, in which the reinsurer undertakes coverage at a variable portion of any claim up to a predetermined limit for an identical portion of the premium. Non- relative reinsurance is sub-divided into excess of loss contracts, in which insurance is granted for single claims, where up to a certain predetermined residual amount the direct insurer incurs the cumulative damages, and above that amount the excess loss is incurred by the reinsurer, and into stop loss contracts, where the reinsurer indemnifies for a portion/ amount of damages in excess of the predetermined portion/ amount. In addition to contractual reinsurance, there is also facultative reinsurance, which is divided across a number of reinsurers.

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relative reinsurance agreement has been signed for a number of large-scale collective insurance policies. For more information regarding reinsurance, see Note 29 to the financial statements. 1.12.8 Suppliers and service providers The Phoenix enters into agreements with a large number of suppliers and service providers in different insurance fields, mainly claim settlement. These are selected on the basis of the nature and quality of their service, availability, and areas of expertise. The various types of agreements with these suppliers and service providers include payments according to all inclusive tariffs, by activity, according to a percentage of the risk, according to hourly rates and per opinion. The Phoenix also has agreements in the field of information systems, with a range of hardware and software suppliers. The manner in which agreements are drawn up with those suppliers includes a fixed price for a project, hourly rates and agreed prices per unit. Replacement of service providers in the field of information systems involves costs and time, as by nature, such providers accumulate knowledge as they supply the services. There is sometimes a consequent short term dependency on a service provider when a project must be completed within a limited time frame in response to regulatory changes or in a field in which the supplier’s accumulated knowledge provides that supplier with an advantage. 1.12.9 Actuarial responsibility and risk management The Phoenix's risk management system is founded on basic risk management and control principles and include involvement by The Phoenix's board of directors in managing risk, provision of tools for mapping, rating and assessing key risks and arranging for means for supervising and controlling such risks. The Control of Financial Services (Insurance) Law 5741 – 1981, determines that an insurer, including a company managing a pension fund, must appoint a “responsible actuary” for each field of insurance in which the company is involved and that the insurer and any pension fund under the insurer’s management must appoint a “risk manager”. The responsible actuary’s tasks include making recommendations to the Board of Directors and the CEO concerning the insurer’s level of insurance liabilities or concerning the actuarial balance in the pension fund managed by the insurer. The risk manager’s tasks include advising the Board of Directors and the CEO concerning the risks faced by the insurer and any pension fund managed by the insurer. The responsibilities of the responsible actuary and of the risk manager, and their relationship with other officers are detailed in the Supervisor of Insurance's memorandum dated October 3, 2006. In 2012, the Solvency II regulatory directive is expected to come into force. The Solvency II directive regulates the capital requirements are risk management processes for insurance companies. Under the "Preparation for Solvency II" memorandum, the Supervisor of Insurance required that companies initiate processes to guarantee organizational preparedness for implementing the proposed directive. The Phoenix is currently preparing for implementation of the directive according to the multi-year plan presented by the board of directors, and according to its 2010 work plan. 1.12.10 Fixed assets and equipment Offices of The Phoenix Group, Beit Havered, Givatayim: The Phoenix Insurance is the owner of 15 floors of office space in this building, with a total area of 18,745 square meters (gross), storerooms with a total area of 699 square meters and 308 parking spaces in an underground parking lot. The building is located at 53 Derech Hashalom, Givatayim, and serves as The Phoenix Group's offices. According to the financial statements, the building’s adjusted value amounts to NIS 192.349 million. The Phoenix owns additional real estate assets with an insignificant adjusted value. Information Systems: The Phoenix has information systems which comprise hardware, software and additional equipment with an amortized cost at December 31, 2009 of NIS 4.965 million. In 2007, 2008 and 2009, The Phoenix invested the respective amounts of NIS 117.784 million, NIS 112.152 million and NIS 121.403 million in software. In 2007, 2008 and 2009, The Phoenix invested the respective amounts of NIS 23.225 million, NIS 14.303 million and NIS 18.682 million in hardware. In 2009, The Phoenix's information systems-related current expenses amounted to NIS 143.9 million compared with current expenses of NIS 133.9 million in 2008. The increase in current expenses stems primarily from increased depreciation of computers. The Phoenix’s computer setup serves its employees throughout the country and provides The Phoenix’s pension funds with computer services and work environments using The Phoenix Group’s computer systems. In addition, the computer infrastructure supports The Phoenix's agents and their employees, who are located around the country and use various different communications infrastructures.

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The Phoenix Group’s central IT infrastructure is based on IBM UNIX computers and serves approximately 3,000 users simultaneously. The Phoenix’s IT center is in its main building in Givatayim. The Phoenix has another computing site in Netanya, which serves as a live backup site, including UNIX computers and data storage units. This site guarantees business continuity in the event that the main site goes offline. 1.12.11 Intangible assets The Phoenix’s name is a registered trademark. The Phoenix has trademarks for a number of brands and insurance products and operates databases registered by law as required by the Privacy Protection Law 5741 – 1981. These databases are vital to the running of The Phoenix business activities and include databases for the salary data of The Phoenix Insurance’s employees, life insurance, elementary insurance, policy expenses and claim payments. Through its employees and suppliers, The Phoenix Insurance develops software for in-house use and holds copyright for that software. In accordance with an agreement from August 2006 between The Phoenix Insurance and Excellence, Excellence granted The Phoenix Insurance the right to use “the Excellence” name for its “Excellence Invest” policies in consideration of the management fees stipulated in the agreement, for as long as the management agreement for management of the investment portfolios for the abovementioned policies remains valid. 1.12.12 Human capital A. Organizational structure

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B. Workforce at The Phoenix The following table provides details of The Phoenix workforce at December 31, 2009.

December 31, 2009 Management 16 Customer Division 609 General Insurance 70 Long-term Savings 40 Health 25 Claims Department 190 Distribution Channels 36 Functional Headquarters 442 The Phoenix Investments 22 The Phoenix Pension 23 The Phoenix Provident 9 The Phoenix Insurance Agencies 1 Total for The Phoenix excluding The Phoenix-owned insurance 1,483 agencies and excluding financial services (Excellence) Financial Services (Excellence) 519 Insurance agencies controlled by The Phoenix** 460 Total The Phoenix 2,462 . On December 31, 2008, The Phoenix had 1,483 employees. The increase in employees in 2009 was mainly due to the addition of Prisma Trust Funds employees to Excellence's workforce, following the acquisition of Prisma's operations as detailed in section 1.12.3(F)(1) above. C. Benefits and employment agreements In accordance with the policies previously employed at The Phoenix, veteran employees are not signatories to any employment agreements whatsoever. Beginning in 2002, and after the Employee Information (Work Conditions) Law 5762 – 2002 came into effect, new employees are given a form listing their conditions of employment and as required by the law. New employees beginning work during 2004 were required to sign personal employment agreements which list their conditions of employment and the ancillary conditions, including social benefits and the employee’s rights and duties. The vast majority of the Phoenix’s employees are entitled to employee and employer contributions to social benefits and disability in pension insurance and some of them also have deposits in a central compensation fund. In accordance with The Phoenix’s internal procedures all employees are entitled to a loan of between one and three months’ wages. D. Officers and senior management and option plans for employees and officers Officers and senior management staff are employed in accordance with personal employment agreements and benefit from of a range of remuneration methods, including wage increases and bonuses determined annually by The Phoenix's board of directors, principally according to business results. In 2007, The Phoenix adopted an employee and officer payment plan through which it can grant its employees and officers and those in the companies under its control, either directly or indirectly, at no cost, option warrants not listed for trading on the stock exchange. These options warrants are exercisable as ordinary shares in The Phoenix, each with a par value of NIS 1. In 2008 and 2009 (and until the reporting date), a number of option warrant allotments were approved under this payment plan. E. CEO of The Phoenix Mr. Yahali Shefi served as CEO of The Phoenix and CEO of The Phoenix Insurance until May 31, 2009. On March 19, 2009, The Phoenix decided to appoint Mr. Eyal Lapidot as CEO of The Phoenix and CEO of The Phoenix Insurance and further determined Mr. Lapidot's terms of employment. The terms of employment went into effect on June 1, 2009 (prior to the

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execution of the employment agreement), and will remain in effect for a period of five years. For details regarding the terms of Mr. Eyal Lapidot's employment, see the detail according to Regulation 21 in Chapter D to this report. 1.12.13 Management of investments The Phoenix manages the following investments:

1. General insurance liability funds 2. Funds from life insurance policies with guaranteed yield 3. Equity and surplus capital 4. Funds from life insurance policies participating in the profits 5. Funds from members of pension funds 6. Funds from members of provident funds The monies for the different types of insurance liabilities are invested in a range of assets, according to the nature and type of liability and subject to the regulations on the manner of such investments, which determine, inter alia, provisions referring to the types of assets that an insurer is entitled to hold against the insurers various liabilities and other limitations to ensure the stability of institutional bodies, how the investments are managed, and the fitness required of them when making investment decisions. The Supervision Law and the provisions referring to the manner of such investments determine, inter alia, that the board of directors of an insurer shall appoint two investment committees. One committee shall manage the investment portfolio for the monies that will cover performance-based liabilities (monies belonging to members / policyholders – in the insurance company’s participatory portfolio) (the participatory investments committee). The second is the committee for the investment of the insurer’s equity and the investment of monies covering insurance liabilities, which are not performance-based liabilities (monies from general insurance, life insurance with a guaranteed yield, capital and surplus capital) (the "Nostro Investments Committee"). The Provident Funds Law and the Provident Funds Regulations prescribe methods for investments of savings as part of pension and provident activities, including the different types of assets, the limitations and the different investment frameworks. In 2006, following reorganization at The Phoenix, the Investments Division at The Phoenix Insurance was transferred to The Phoenix Investments. Accordingly, at the date of this report, management agreements have been signed for investment management services, management and operation of members’ monies and the nostro monies in return for management fees. Management agreements are between The Phoenix Investments and The Phoenix Holdings, The Phoenix Insurance, The Phoenix Pension and The Phoenix Provident. Investments are managed by a number of investment managers with complete separation between the management of the nostro monies belonging to The Phoenix companies and the management of the monies belonging to policyholders and members (in The Phoenix Insurance and The Phoenix Pension and The Phoenix Provident). The investment managers are supported by the internal economics department and use surveys and analyst reports from banks and investment houses in Israel and abroad. As part of the policy to diversify and disperse investments, since 2004, The Phoenix has been involved in non-bank financing for companies. This credit is approved by the relevant investment committees. The Phoenix’s non-marketable credit portfolio, which includes non-marketable debentures, loans, deposits and capital notes, and with the exception of Hetz and Arad debentures, amounted to NIS 6.7 billion and NIS 6.8 billion at December 31, 2008 and 2009, respectively. Of this amount, the nostro share of the non-marketable credit portfolio amounted to NIS 4.7 billion and NIS 3 billion respectively and the balance is profit-sharing, pension and provident fund. As a result of the financial crisis which began in 2008, credit risks continued to rise in the first half of 2009, as was also reflected in an increase in savings margins and debenture yields of all grades, yield volatility and downgrading of debit assets by the rating companies during 2008. The negative forecast of the repayment ability of some of the borrowers and the downgrading of some of the companies led The Phoenix to make provisions for doubtful debts on some of its loans. With the start of economic recovery and with improvement of the position of borrowers in 2009, most financing efforts were directed towards investment in new credit.

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The recovery from the economic crisis of 2008 and the improvements seen in the capital markets during 2009 had a number of material consequences on The Phoenix’s investments in 2009: A. Profits in The Phoenix’s investment activity – In the reporting year, material gains were recorded in The Phoenix’s investment activity, The Phoenix’s nostro portfolio and investments against insurance liabilities, mainly due to the revaluation of marketable assets. B. Nearing the target date for renewed collection of variable management fees, following the 2008 losses – In 2009, despite an inflation rate of 3.9%, member portfolios registered elevated real yields. However, these yields did not yet enable the renewed collection of variable management fees. When a cumulative positive real yield is achieved which covers the full extent of the negative real yield left over from the 2008 losses, The Phoenix will be able to renew the collection of variable management fees. For details of the estimate of the management fees which will not be collected because of the negative yield in The Phoenix Insurance, see section 1.12.3(A)(5) below. C. The positive market atmosphere supported actions for reducing portfolio risk levels, with an eye towards the long term - Actions were carried out in the nostro portfolio aimed at improving the correlation between the duration for assets and for liabilities (ALM). In member portfolios, the sharp increases in the markets were utilized for reducing the risk level through optimizing the quality of issuers in the corporate bonds portfolio, and changing the allocation between marketable and non-marketable assets. Furthermore, the investment committees and the board of directors determined limits for maximum exposure at the investment channel level in the various portfolios, and at the issuer level, the borrower group level, the market sectors, and more. D. The 2008 economic crisis reduced the yield for The Phoenix's customers – In 2008, The Phoenix’s yields were more negative than the sector average. In 2009, following actions aimed at reducing risks in a rising market, high positive yields were recorded. However, these positive yields were occasionally lower than the sector average. These yields in the investment portfolios in the long-term savings sector may have a negative impact on The Phoenix’s competitiveness with all that this entails. E. Materialization of the risks in The Phoenix investment portfolio – In 2008, there was a general deterioration in The Phoenix’s investment portfolio, due to the materialization of a number of risks, against the background of an exceptional crisis in the capital markets. In 2009, The Phoenix acted to reduce the risk in the investment portfolios for profit-sharing policies and in the nostro portfolio. These actions included, among other things: increasing the portion of government bonds in the portfolios at the expense of corporate bonds; optimizing the quality of issuers in the non-marketable credit and corporate bonds portfolio, which was expressed in increasing the average rating of issuers in the portfolio; establishing a set of restrictions on investment regarding exposure to sectors, issuers, corporations, geographic regions, etc. Such actions contributed to reducing exposure to the larger issuers and so achieving better risk dispersion; in foreign portfolios - preferring investment through index-linked certificates and funds over investment in single shares while maintaining the core portfolio in developed market indices; actions aimed at better correlation of the duration for assets and for liabilities in the nostro portfolio and cessation of investments made through investment funds in high- risk markets; actions aimed at reducing future liabilities to investment funds and avoiding issuing liabilities to new funds, which contributed to materially reducing the weight of this investment channel in the portfolios. 1.12.14 Investments The Phoenix has investments in real estate, companies and a range of other assets. The major investments of The Phoenix include ownership of 41.42% in the public company Mehadrin Ltd, which is active principally in the agriculture industry, as well as ownership of 49% of the issued and paid-up share capital of Gama Management and Clearing Ltd. ("Gama"). Under a 2008 agreement signed between The Phoenix Investments and the shareholders in Gama, The Phoenix was also granted a call option, which upon its exercise, would grant The Phoenix a 51% stake in the issued and paid-up capital of Gama. Gama Management and Clearing Ltd. is a private company which engages, inter alia, in discounting credit card transactions. It is the largest group in Israel providing financial services for credit cards. As part of the company’s activities, Gama enables marketing chains and businesses to sell goods against long-term credit card payments and receive the sum of the transactions immediately in cash.

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1.12.15 Financing A. The Phoenix finances its activities through independents, bank credit and non-bank credit. The following table provides details of the average nominal interest rates for loans taken from bank and non-bank sources, valid during 2009, but not intended for exclusive use by The Phoenix: Average interest rate for for loans not intended for exclusive use by The Phoenix Deferred promissory Long-term Short-term Average Rate notes loans loans Banking sources* – CPI linked 4.58% 4.55% 5.05% 5.05% Banking sources – USD-linked Banking sources – EUR linked 6.08% 6.08% Banking sources – non-linked 3.09% 4.05% 2.59% Non-banking sources** – CPI- linked 4.48% 4.43% 5.55% 4.09% * Including, inter alia, deferred promissory notes issued in August 2001 to institutional bodies, some of which were purchased by banks. ** Including bonds issued in 2007 to institutional bodies, and including promissory notes issued by The Phoenix Capital Resources in August 2009. B. Capital resources In February 2008, The Phoenix raised NIS 200 million by an issue of a deferred promissory note to Bank Hapoalim and other entities listed in the note for a period of six years, at an annual interest rate of 4.6%. The principal and interest are CPI-linked. The principal will be repaid in 16 equal quarterly installments starting in May 2010. The interest is paid in quarterly installments from May 2008. In August 2009, The Phoenix conducted a rights issuing of ordinary shares of NIS 1 par value for a total consideration of NIS 125.5 million. The Phoenix exercised the full extent of rights offered it. In August 2009, a special purpose company known as The Phoenix Capital Resources (2009) Ltd., which engages in raising funds in Israel for The Phoenix Insurance, raised NIS 500 million through a prospectus, in which promissory notes (Series A) were offered to the public. Promissory notes which are ranged 'ilAA-/Neg' by Maalot, are linked to the Israeli CPI, and bear an annual interest of 4.4% paid twice-annually each year between 2010 and 2018. The Phoenix Insurance undertook to meet the payment terms of the promissory notes (Series A) issued by The Phoenix Capital Resources. It should be noted that by force of the control permit, The Phoenix is subject to restrictions on the issue of "means of control". C. Credit rating On March 18, 2009, Maalot announced that the rating for The Phoenix Insurance’s deferred promissory notes had been downgraded from ilAA to ilAA- with a negative rating outlook. Maalot also announced that the rating for the debentures of The Phoenix Holdings had been downgraded from ilAA to ilA with negative outlook. On August 17, 2009, Maalot announced that a rating of ilAA for the deferred promissory notes (Series A and Series B) issued by The Phoenix Capital Resources. D. Raising additional resources The Phoenix estimates that in the coming year, it will not require raising of additional resources. 1.12.16 Taxation See: Note 43 to the financial statements. 1.12.17 Restrictions and supervision of The Phoenix’s operations A. The Insurance Contract Law, 5741-1981 (“the Insurance Contract Law”) The Insurance Contract Law mainly regulates the relationship between the insurer and the policyholder, including the status of the insurance agent, and also determines the main provisions in respect of the nature of the Insurance contract, the duty of disclosure and the

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results of non-disclosure, the insurance period and the terms for its termination or abbreviation, the status and rights of the beneficiaries, the provisions relating to the payments of the insurance premiums and their dates, provisions in the matter of changes in the risk of the policyholder, provisions for the manner of payment of insurance benefits including their prescription date, and various provisions relating specifically to the various types of insurance. B. The Supervision Law and its provisions The Phoenix and The Phoenix Insurance are subject to the regulations of the Financial Services (Insurance) Supervision Law 5741–1981 (“the Supervision Law” or “the Law”) and its provisions (“the Supervision Provisions”). The Supervision Law and the Supervision Provisions regulate, inter alia, the following matters: 1. Powers of the Supervisor of Insurance – According to the Supervision Law, the supervisor of the insurance and savings capital market in the Ministry of Finance will be the Supervisor of Insurance. The Law determines the roles and powers of the Supervisor including empowering him to issue directives concerning methods of operation and management of the insurers, insurance agents, their officers and anyone in their employ, to ensure the proper management and preservation of the interests of the policyholders or clients and to prevent harm to the insurer’s ability to fulfill its obligations. 2. Business licenses in the various insurance fields – Engaging in insurance and insurance brokerage requires a license. The Supervision Law determines provisions in respect of licensing insurers and insurance agents, including the power to revoke licenses. 3. Holding means of control – The Supervision Law determines provisions for permits to hold the means of control of an insurer and insurance agency as well as provisions pertaining to prohibitions on material holdings in the long-term savings sector pursuant to the Supervision Law. Holding “means of control”1 in an insurer requires a permit from the Supervisor of Insurance. The control permit for The Phoenix Group companies prescribes various restrictions and duties regarding the issue of means of control, the transfer of holdings by the controlling companies (through others) in said companies, the granting of rights to third parties, the distribution of dividends (see above), and supplementation of the required equity; 4. Supervision of insurance businesses – The Supervision Law determines various provisions in respect of supervision of insurance businesses, including provisions pertaining to restrictions on business management, provisions in the matter of organs and officers in the insurer, handover of reports and directions in the matter of separation of life insurance businesses from other businesses of the insurer. The Law also qualifies the Minister of Finance to enact regulations in various matters connected with supervision of insurance such as types of assets to be held by the insurer against liabilities and methods of their investment; duty of the insurer to hold insurance reserves and the manner of their calculation, operating as an overseas insurer; determining insurance terms for insurance plans and premiums and provisions in respect of maintenance of stability of insurance companies. 5. Provisions in respect of policyholders’ interests – The Supervision Law qualifies the Minister of Finance to enact regulations pertaining to preservation of the interests of policyholders, including the Supervisor’s power to investigate public complaints, provisions regarding the rates of premiums and other payments which the insurer may collect from the policyholders; provisions regarding terms in an insurance contract and their wording as well as provisions regarding the structure and form of an insurance policy. The following regulations were promulgated pursuant to the Supervision Law:

1 “Means of control” is defined in the Supervision Law as follows: (1) The right to vote in the Company’s general meeting or at a corresponding gathering of another body corporate (2) The right to appoint a director of the body corporate; for this purpose (1) the person who appointed a director shall be deemed to have the right to appoint him; (2) if an officer of a body corporate was appointed director in another body corporate, and on the entity that controls that corporation, than it shall be presumed that they have the right to appoint him (3) The right to share in the profits of the body corporate (4) The right to the surplus assets of the body corporate at the time of its liquidation after the discharge of its liabilities

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1. Supervision of Insurance Businesses (Minimum equity required of an insurer) Regulations, 5758-1998 ("the Minimum Equity Regulations") regulate the minimum capital required of an insurer, pursuant to the various definitions relating to the capital of the insurance companies. For further details see section 1.12.2(B) above. 2. Supervision of Insurance Business (Ways of investing an insurer's capital and reserves and liability management), 5761-2001 ("the Investment Method Regulations") include provisions concerning loans that an insurer is entitled to grant, the types of assets that an insurer must hold against various liabilities, restrictions regarding an insurer’s investment in a subsidiary or investee, a controlling shareholder, an interested party, another insurer or in any other corporation engaged in insurance brokerage. The regulations also determine investment methods which restrict investment in options, futures and shorts, and the insurer's obligation to nominate two investment committees, one to manage the profit-sharing insurance investment portfolio and the other to manage the nostro investment portfolio. The regulations include restrictions on investment stability and liquidity, among them an index to spread investment risk, linkage balance sheet for reserve funds and average asset lifespan (duration). 3. Supervision of Insurance Business (Methods for calculating provisions for future claims in general insurance) Regulations, 5745-1984, include regulations concerning the insurer’s obligation to hold insurance reserves, the manner in which they are calculated and provisions for pending claims. 4. Supervision of Insurance Business (Report details) Regulations, 5758-1998, determine regulations concerning the content, details and accounting principles used to draw up an insurer’s annual financial statements and interim financial statements. The regulations include some of the Securities Regulations. (Drawing up of Annual Financial Statements) 5753-1993 and their adaptations to the insurance industry. 5. Supervision of Insurance Business (Policy form and terms) Regulations, 5760- 1980 include criteria constituting an integral part of the content of an insurance policy (such as name of policyholder, policy issue date and premium); highlighting of exclusions on insurer’s liability; provisions regarding the policy content which must be included in the policy; identification details of valuable articles and advance payments for reimbursement of expenses. These regulations apply to insurance policies with the exception of marine insurance. 6. Supervision of Insurance Business (Ways of separating accounts and assets of a life assurer) Regulations, 5744-1984 determine guidelines for the methods used to separate the accounts and assets of life insurance businesses from the insurer’s other insurance businesses, and separation of assets of life insurance businesses participating in profits from assets from all other life insurance business assets. C. Legislation Implementing the Bachar Committee Recommendations As explained in section 1.12.2(D), in July 2005, legislation was passed for the implementation of the Bachar Committee Recommendations. The following are the principal points of law for implementation of those recommendations: 1. Increased Competition Law: The definition of long-term saving assets and the determination of a market share ceiling (15%, about NIS 49 billion); the determination that the banks shall act solely in an advisory capacity (pension and investment advice); definition of the roles of the advisor (pension / investment) and marketer (pension / investment) and a clear distinction between the two; mandatory licensing for institutional employees; a ban on a union of employees or employers serving as a pension agent; higher requirements for fiduciary duties of an agent and advisor; closer supervision of insurers. 2. Consulting and Marketing Law: Firm distinction between a consultant and a marketer and the same licensing obligations for both functions; the determination that a pension insurance transaction can be executed only within an advisory or marketing capacity; the obligation to adapt the product to the client’s needs; the licensee’s obligation to provide the client with written documents explaining why the pension saving scheme is worthwhile, the advisor's recommendation, the obligation of due disclosure concerning conflicts of interest; obligatory documentation of advisory and marketing activities; the

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license holder’s obligations to trust and due care; the obligation to drawn up a written agreement between the advisor and the client; the obligation to maintain confidentiality between a client and an agent; monetary and/or criminal sanctions for the breach of obligations by a licensee. 3. Provident Funds Law: Firm establishment of an employee’s right to choose the fund in which his or her pension savings shall be invested; application of the principle of mobility between provident funds for payments and compensation; instructions on investment of the annuity fund monies; the obligation to collect distribution commissions from the member for pension advice/marketing; wide-ranging obligations to supervise the managing companies; civil and criminal sanctions D. Reporting stakeholder holdings For details on the reporting of holdings by stakeholders of The Phoenix, Excellence and the Delek Group, which did not take into account increases in the cumulative holdings exceeding %% of the aforesaid companies in public companies, and the implications thereof, see the Company's immediate statement dated August 13, 2009 (ref. no. 2009-01-196971), included herein by reference. The Delek Group, The Phoenix, and Excellence report through a shared computer system as required. 1.12.18 Significant agreements For details regarding the agreement pertaining to the acquisition of Excellence, see Note 14 to the financial statements. 1.12.19 Legal proceedings As part of the regular course of business of The Phoenix in the insurance sector, The Phoenix is involved in a number of legal proceedings. Furthermore, at the reporting date, there are a number of motions pending for certification of class actions suits against The Phoenix. The exposure from these lawsuits, and in particular if The Phoenix loses these class actions, if certified, could have a material effect on the results of The Phoenix’s operations. It is noted that in 2009, three motions for certification as class action suits against The Phoenix were approved. In 2010, as of the date of the report, one such motion as aforesaid was approved. For these suits there is a greater risk that The Phoenix’s statement of defense will be dismissed. Furthermore, it should be noted that in 2009, a settlement agreement was submitted for court approval. This settlement agreement was signed by The Phoenix and other insurance companies and a plaintiff, who filed claims and requested certification as a class action. 1.12.20 Business objectives and strategy The Phoenix aims to position itself as a leading company in the various insurance segments and in the finance segment, inter alia, as regards innovativeness and service, to expand its operations and increase its profitability. Furthermore, The Phoenix seeks attractive investment opportunities while regularly examining its investments in non-core segments, and the suitability of such investments to The Phoenix's goals and core investments. 1.12.21 Risk factors A. Market conditions – The general market condition has an effect on The Phoenix’s businesses. A recession, also caused by a deterioration in the security or global economic situation, could cause a decline in the volumes of deposits in the various long-term savings channels and even withdrawal of pension and medium-term savings (study funds) to meet present needs, increase in lost debts, reduction of the cover purchased in insurance policies, increase in the number of insurance events and claims (because of an increase in the number of break-ins and frauds), filing of claims on earlier dates, and increasing competition in the various sectors of operation. In 2008, the global economic crisis began to have a decisive effect on the Israeli market, after a number of years in which Israel had recorded economic growth. 2009 was characterized by emergence from the 2008 global economic crisis, and this had a positive effect on the Israeli economy, and consequently on the results of the insurance companies. B. Employment level – The national level of employment has a significant influence on The Phoenix business interests in the field of long-term savings, as it influences the allocation of funds to the various savings channels. Furthermore, the drop in the number of employed (an increase in unemployment) and in wage levels has a negative effect on the volume of new sales and cancellation rates in insurance portfolios.

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C. Market risks – Changes in the principle market risks, such as: share risks, interest risks, spread risks, currency risks, and inflation risks, may lead to the devaluation of assets held by The Phoenix. 1. Capital markets in Israel and around the world – A significant proportion of The Phoenix assets portfolio is invested in securities in capital markets in Israel and other countries (principally in the USA and Europe) and in financial derivatives which typically suffer from fluctuations caused by market risks and political and economic events in Israel and around the world. The Phoenix Insurance manages the negotiable assets held, inter alia, against insurance liabilities, while taking into account market risks and the nature of the liabilities, such as linkages and the yield required. Sharp fluctuations in investment asset prices are liable to affect the reported value of the negotiable securities portfolio on The Phoenix’s capital and on its reported profits. In view of the investments in financial and other assets, changes in the capital markets and the value of capital market assets have a significant influence on The Phoenix’s results, both in terms of profits stemming from profit-sharing managers’ insurance policies and in terms of The Phoenix’s nostro portfolios. In addition, the situation in the capital markets in Israel and abroad is liable to cause and in the reporting period has caused the collapse of key financial institutions and this increases the risk in The Phoenix’s agreements with these entities (counterparty risk). 2009 was characterized by emergence from the financial crisis, and by sharp gains in the capital markets. Losses in the securities markets in Israel and abroad in 2008 caused both a "deficit" in the variable management fees which can be collected from members in profit- sharing policies, and a reduction in the fixed management fees due to a reduction in the scope of assets managed. This deficit had a negative impact on The Phoenix's profitability in 2009, and is further expected to detract from its profitability in 2010 until its full coverage. 2. Interest risks – Losses which could arise from changes in the interest curves in Israel and abroad. The Phoenix holds linked, shekel and foreign-currency debentures against its insurance liabilities. Therefore, a rise in the interest curves in Israel and abroad will result in losses in the portfolio caused by the drops in debenture prices. Furthermore, increased interest rates may increase proceeds in the long-term savings segment in general and in the guaranteed-yield policies in particular. 3. Spread risk – The loss that is liable to be generated as a result of changes in the spread risk between concern-related debentures and government bonds (no risk). Spread risk changes are meant to reflect the changes in accumulated borrower insolvency and changes caused by market volatility. 4. Exchange rate risks – The Phoenix’s investments abroad are exposed to changes in the exchange rates for those currencies in which the investments were made and principally, changes in the rates for the US dollar, euro, sterling and yen. Moreover, changes in exchange rates affect the value of assets in foreign currencies included in The Phoenix’s investment portfolio, insurance liabilities and activities conducted with reinsurers (when the cover price is in dollars). 5. Inflation risks – Among other things, The Phoenix holds non-linked financial assets and a rise in the CPI will result in the erosion of their value. Moreover, as the majority of The Phoenix's insurance liabilities are CPI-linked, holding non-linked assets may have a negative effect on The Phoenix's profitability in the event of an increase in the CPI. 6. ALM risks - Risks due to a discrepancy between insurance liabilities and assets held by The Phoenix. Such a discrepancy may arise, inter alia, from timing differences (duration differences between liabilities and assets), in scope (a liabilities value which is materially higher than the value of assets), in currency (assets and liabilities held in different currencies), and in linkage to the CPI. The Phoenix is exposed mainly to inflationary risks. D. Liquidity risks – Inability to sell assets immediately or without having a detrimental effect on their value due to low marketability may lead to losses upon realization of such assets. The Company holds, inter alia, non-marketable assets and low-marketability assets. These holdings include corporate bonds, loans, non-marketable shares, low-marketability shares and alternative investments. The marketability issue is exacerbated in times of crisis, when deteriorating market conditions have a negative effect on the liquidity of assets. E. Credit risks – The risks for financial losses due to counterparts not meeting their obligations or a downgrading of their credit rating. The Phoenix invests part of its assets in the provision of

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credit, loans and mortgages to corporations, agents and various other borrowers; in various types of deposits in the Israeli banking system; in negotiable and non-negotiable securities; in financial instruments such as credit trusts, CDOs and more. Furthermore, The Phoenix is exposed to the risks of the reinsurers with which it has signed insurance contracts. Defaults on obligations by counterparts to the agreement as a result of insolvency, and impairment of the debt due to a drop in a borrower’s credit rating or in their repayment ability, will have an adverse effect on The Phoenix profits. F. Changes in public preferences – The public’s tendency to choose substitute products in the different fields (pension, provident funds, or executive insurance) or the public’s tendency not to undertake insurance policies may have an effect on demand for The Group’s products and its profitability in the different fields. G. Regulation and dependency on licenses – The Phoenix’s activities are subject to extensive regulatory demands. There is a continuing trend towards greater strictness and the addition of more regulatory demands as well as stronger enforcement of these demands. Non- compliance with regulatory demands might result in a range of sanctions and damage to the Company’s goodwill. In particular, insurance companies are subject to the provisions of the Supervision Law, regulations and memoranda issued based on that law and the directives issued by the Supervisor of Insurance. These changes have an effect on financial reporting, the Company’s operations, and its profitability. Some of The Phoenix Group’s companies operate in accordance with limited period licenses granted to the companies in accordance with the law by the Supervisor of Insurance. Non-compliance with the license conditions might result in sanctions or even cancellation of the licenses. Furthermore, regulation in the insurance industry has a significant effect on the premiums collected for the different products. The provisions in law, instructions and agreements pertaining to the structure of savings in the economy and principally, those pertaining to pension savings, including the associated tax implications, have an effect on the companies’ life insurance portfolios and long-term savings; the volume of their future sales and the level of costs incurred by the companies active in this field. The Phoenix's insurance agencies are subject to regulatory directives, and changes in these directives may impact their operations and profitability. In addition to the regulation in the insurance and long-term sectors, The Phoenix is subject to the regulatory requirements of securities laws and Companies Law and noncompliance therewith is liable to generate various sanctions as well as damage to goodwill. As The Phoenix is controlled by the Company, it may be affected by the Supervisor of Banks in Israel's Proper Conduct of Banking Business Directives. These include, inter alia, restrictions on the scope of loans that a bank in Israel may issue to a single borrower, to the six largest borrowers and to the group of largest borrowers in the banking corporation (as these terms are defined in the above directives) The Phoenix Insurance is subject to equity adequacy requirements. Low equity levels (although conforming to equity adequacy requirements) may have a negative impact on the Company's operations and its ability to insure new businesses. In 2009, the minimum equity requirements for insurance companies were increased, and the rules for recognition of tier-1 and tier-2 equity were made more stringent. As part of the implementation process for the Solvency II directive, insurance companies may be required to supplement their equity. H. Legal precedents – The Phoenix is exposed to legal decisions that might constitute binding legal precedents in reference to insurance activities, change the scope of The Phoenix liabilities and incur unexpected costs for insurance policy transactions. I. Claims and class actions – The Phoenix is exposed to numerous claims in the context of the Company’s insurance activities (such as investments and extension of credit), and in particular is exposed to those lawsuits with the potential to become class actions, and The Phoenix might find itself obliged to pay very considerable sums. At the reporting date, a number of legal processes are underway and if they are certified as class actions, the exposure to them will increase. If The Phoenix loses these class actions or other material legal proceedings or is forced to compromise in those suits, they might have a material effect on the Company’s activities. J. Competition – Intensified competition in those fields in which The Phoenix is active might have a detrimental effect on The Phoenix’s profits. Increased competition might arise from fiercer competition between existing competitors; the entry of new competitors, or the entry of new distribution channels (such as the entry of the banks as pension consultants). Competition has an effect in terms of market share, product tariffs and The Phoenix’s costs.

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The entry of the banking system into the distribution of long-term savings products may increase competition with the primary distribution channels currently employed by the Company. K. Policy retention – Activities in life insurance, provident funds and pension funds segments are vulnerable to policy cancellations and redemptions during the policy period. The ability to retain the existing client portfolio depends, among other things, on the terms of the policy, fund or trust as appropriate, the terms offered by competitors, the policyholders’ ability to transfer their money, market conditions, marketing activities and more. The Phoenix’s ability to retain its existing life insurance portfolio depends, inter alia, on its ability to achieve favorable results compared with its competitors. L. Reforms in long-term savings – Very significant reforms were recently introduced for long- term savings, in addition to earlier reforms such as the Bachar reforms. These can be expected to have a very significant, across the board effect on the industry in the future. The reforms include Amendment No. 3 to the Provident Fund Law, which seeks, inter alia, to unify tax regulations applicable to financial products and ensure a level of pension savings for all savers; pension mobility regulations which make arrangements for the transition between the different pensions saving products – provident funds, life insurance and pension fund programs – and enable consumer mobility between pension savings products or the replacement of the managing body for the savings by a different managing body, at any time, without any need for payment when the monies are transferred between products in keeping with savers’ preferences; the arrangements made for an obligatory pension, which determine inter alia, the obligation to make contributions to a provident fund for a pension. The aforementioned reforms, and principally the pension mobility reform, might have an effect on The Phoenix’s activities and/or its future results because they might result in increased competition, the movement of policyholders from life insurance programs to pension funds and reduced margins for some existing life insurance portfolios. Currently, life insurance and provident funds constitute the main pension channels in the asset portfolios managed by The Phoenix. Therefore, the transition from these channels to the pension fund channel might have a significantly adverse effect on the maintenance of the life insurance and provident fund portfolio at The Phoenix and subsequently, on the Company’s income from that portfolio. For further details concerning the aforementioned reforms, see section 1.12.2(D) above. M. Dependence on marketing and distribution channels – In view of the increasing level of competition, The Phoenix has been compelled to intensify its activities conducted through existing marketing channels and to expand into additional marketing channels, including the banking system. The competition leads not only to a drop in prices – expansion of marketing activities also incur high costs which might have an effect on business results. In addition, the entry of new players, not receiving commissions from the bodies issuing the life insurance annuity and pension products, as pension advisors, can be expected to exacerbate competition and also harm the operations and results of the agencies held by The Phoenix. N. Operating risks – During its business activities, The Phoenix is exposed to many operating risks, such as failure of internal systems, failure of computing and information systems including a lack of information security, human error (employees, agents and suppliers), fraud, computer crime and external damage to the Company (such as earthquakes). Specifically, a significant proportion of The Phoenix activities (business activities, regulatory demands and operations) rely on computerized information systems. Therefore, a lack of sufficient infrastructure or alternatively, failures in The Phoenix’s computing systems might cause significant damage. O. Insurance risks – The Phoenix is exposed to risks associated with pricing and the assessment of insurance liabilities. The insurance policies sold by the Company cover a range of risks, such as life expectancy, disease, natural disasters and theft. Pricing of policies and the assessment of insurance liabilities are based on past experience, assessment of the legal situation, and the deterioration of and changes to existing risk factors. Mistakes in the pricing of liabilities could result from selection of the wrong pricing model (model risk), use of biased parameters in the pricing model (risk parameters) and an increased rate of cancellations of the existing policies. P. Reinsurance – The Phoenix buys reinsurance on international markets. The Phoenix ability to buy reinsurance on good terms is influenced by the company's performance in particular and global reinsurance capacity (dependent upon among other things on reinsurers’ stability and the incidence of catastrophic events around the world). Changes in the cost and scope of reinsurance offered in these markets have an influence on The Phoenix profits and its ability to

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expand the insurance volume and commit to certain insurance liabilities. Furthermore, reinsurance does not absolve The Phoenix from its obligations towards its policyholders in accordance with the insurance policies and for that reason, reinsurers’ financial stability and credit ratings influence the business results of insurance companies. Therefore, non-fulfillment of a reinsurer’s commitments to The Phoenix might have a significant effect on the Company’s ability to meet its obligations to its clients (for example, in the event of a catastrophe). Q. Damage to goodwill – The Phoenix’s goodwill and reputation constitute important factors in the scale of The Phoenix's operations and profitability, when The Phoenix conducts business with new clients and in the retention of existing clients. Embezzlement, legal proceedings against The Phoenix and irregular or illegal activities might damage the Company’s good name. R. Exposure to the financial integrity of The Phoenix, the value of its shares or its rating – Harm to the financial integrity of The Phoenix, the value of its shares or a lowering of its credit rating could make it difficult for it to operate and affect the future terms of its capital and debt raising insofar as needed which might be necessary in order to comply with capital adequacy requirements. 1.12.22 Risk factors table The following table gives details of the principal risk factors to which The Phoenix is exposed and their potential degree of influence on its business: Effects of risk factors on The Phoenix's activities Risk factor Major Moderate Minor Macro risks Economic situation 9 Employment levels 9 Market risks 9 Liquidity risks 9 Credit risks 9 Changes in public preferences 9 Industry risks Regulation and dependency on licenses 9 Legal precedents 9 Lawsuits and class actions 9 Competition 9 Reforms in long-term savings 9 Portfolio retention rates 9 Reinsurance 9 Insurance risks 9 Risks specific to The Phoenix Damage to goodwill 9 Damage to The Phoenix's financial integrity, share 9 value, and rating Operating risks 9

The degree to which the risk factors affect The Phoenix is based on the assessments made by The Phoenix’s management, while taking into account the scope and nature of the Company’s activities at the date of this statement. Changes in activity characteristics and/or market conditions might also change the degree of the effect.

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1.13 Insurance segment in the U.S.

Delek Group's operations in the insurance sector in the United States of America was acquired in December 2006 for a total consideration, including transaction expenses, of USD 298 million, which was paid upon completion of the transaction Hereunder chart of the primary holdings in the insurance sector in the United States.*

Delek Capital

100%

Delek Finance US Inc.

99.97%* *

Republic Companies, Inc. (RCI)

Holdings in various companies in the field*

* All the held companies also controlled companies, and are consolidated in the financial statements ** The balance of RCI is owned by senior officers of the Company.

1.13.1 General information on the segment of operations A. Structure of segment of operations Republic Companies Inc. ("Republic"), an insurance holding company that was formed in Delaware, conducts its primary operations through several subsidiaries in insurance segments such as property, auto and liability insurance, and personal and commercial insurance lines (for small and medium size businesses) primarily in Texas, Louisiana, Oklahoma and New Mexico. Republic has operated under this name in the insurance sector in the United States since the beginning of the twentieth century.

Unless stated otherwise, in this chapter, the terms “Republic Group” or the “Group” will be used to describe Republic and its subsidiaries and affiliates. Republic Group has four distribution channels: 1. Personal Lines – Insurance agents and agencies selling Republic insurance policies for homeowners (“Personal Insurance”). 2. Commercial Lines – Insurance agents and agencies selling Republic insurance policies to small and middle size businesses (“Commercial Insurance”). 3. Program Management – Managing General Agencies (“MGAs") which offer, alongside the Republic Group's standard insurance products, additional products. Contrary to the operations of the MGAs in the personal and commercial insurance segments, which are primarily marketing, the MGAs in the Program Management issue policies independently under the Republic name, or under the names of its subsidiaries and affiliates, while exercising their discretion in respect of the terms and prices of the policies, and handle

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the insurance claims. Republic specifies guidelines for operation of the MGAs and supervises and supports the insurance outcome. 4. Insurance services – Insurance services for insurance companies (“Insurance Services”), cooperation with insurance companies not affiliated to the Republic Group, by providing fronting services allowing these companies to use Republic Groups licenses and rights in the areas in which it owns licenses, in return for fronting fees, and subject to signing reinsurance agreements with these companies. Republic is liable for covering insurance claims of these policyholders, however, it is fully backed by reinsurance with the insurance companies. This segment also includes other operations and holdings. Property and liability insurance provide protection for predetermined incidents such as damage to property and third party claims. Personal property and casualty insurance for individuals can be distinguished from commercial property and casualty insurance for businesses. The Republic Group operates in both segments. Furthermore, the standard (admitted) market can be distinguished from the non-standard (non-admitted) market. In the admitted market, the policies and prices are usually supervised and the cover tends to be standard. In this market, the Republic Group focuses on the less competitive market segments, in which the large insurance companies are less involved due to factors such as type of business, location or premiums. The Republic Group's personal and commercial insurance lines operate primarily in these market segments. The non- admitted market focuses on risks with a probability of occurrence that is difficult to estimate and which are covered by more flexible policies and prices. It is usually not possible to supervise the cover in this market. The Republic Group operates in this market in the MGAs and insurance services segments. In general, Republic operates in tail end insurance segments, in other words segments in which insurance claim investigations are relatively short. For further particulars relating to the Republic Group's areas of operation, see Section 1.15.2 below. The table below presents financial information pertaining to the Republic Group's core operations. The operating income relates to the total income less claims, acquisitions and operating expenses but does not contain interest expenses on debts, the non-controlling interest and capital gains in companies which are not consolidated, in accordance with the US GAAP standards (in USD millions)1:

Year ended December 31, 2009:

Insurance Gross premiums Investment Total Operating premiums earned results Other revenues profit2 Personal insurance 221.3 173.3 13.5 2.5 189.3 (10.6) Commercial 132.0 97.6 11.6 0.4 109.6 8.1 insurance MGAs 268.1 94.3 8.0 3.5 105.8 9.7 Insurance services 289.8 0 3.5 10.5 14.1 6.8 Consolidated 911.2 365.2 36.6 16.9 418.8 14.0

1 The figures, pursuant to the US GAAP are not materially different from the figures included in the business results of Delek Group pursuant to the IFRS. 2 Operating profit refers to the profit before financing expenses and tax and before one-time items and non-controlling interest

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For the year ended December 31, 2008:

Insurance Gross premiums Investment Total Operating premiums earned results Other revenues profit Personal insurance 210.6 158.9 3.1 1.6 163.5 (36.1) Commercial 131.6 96.5 2.7 0.4 99.6 (6.3) insurance MGAs 269.6 119.8 2.2 4.8 126.9 2.2 Insurance services 218.3 0 1.3 8.8 10.1 4.5 Consolidated 830.0 375.2 9.3 15.6 400.1 (35.7)

For the year ended December 31, 2007:

Insurance Gross premiums Investment Total Operating premiums earned results Other revenues profit Personal insurance 197.3 143.6 8.1 1.6 153.3 15.1 Commercial 121.3 83.5 6.6 0.3 90.4 11.4 insurance MGAs 244.9 92.4 5.3 3.6 101.3 17.4 Insurance services 200.9 0 2.4 5.0 7.4 6.4 Consolidated 764.4 319.5 22.4 10.5 352.4 50.2

In 2009, net premiums amounted to USD 911.2 million compared with USD 830.0 million in 2008, in other words, an increase of 9.8%. Although prices in the US insurance market are continuing to fall, particularly in commercial sectors, the inclusion of new products, including new policies for private car insurance and expansion of a new plan for public entities in the comercial insurance segments, in addition to expanding into new geographic regions, enabled growth in the commercial insurance segments. The real growth was in the program management and insurance services segments. The following factors contributed to Republic's further premium growth: • Continued growth from a new car insurance plan and in insurance plans for low- value housing in Texas and in other States, and in addition, further growth in the volume of premiums in Mississippi, Arkansas and Arizona due to the acquisition of two general insurance MGAs in 2007 and 2008. • The commercial segment has good customer retention, combined with continuous growth in Louisiana, Arkansas, and Mississippi. Despite the decline in market prices in 2009 and termination of the insurance plan for farms and ranches, which recorded insufficient performance, Republic's commercial segment managed to remain stable in 2009, while one of the reasons for this is the expansion of the markets for the company’s products. • The Program Management remained stable in 2009. The expansion of insurance plans in the workers’ compensation segment California offset the loss of premiums from the termination of a large-scale plan of an MGA for commercial vehicles and liability plans for small business customers. The plan that terminated was converted to a plan, which is fully covered by reinsurance, in the insurance services segment, although with a lower premium turnover. • The premiums recorded in the insurance services segment increase by 32.8% in 2009. The majority of this growth stems from transferring operations from the terminated plan, which previously belonged to the program management segment. Nonetheless, growth continue also for the car plan in this segment. In 2008, net premiums amounted to USD 830 million compared with USD 764.4 million in 2007, i.e. an increase of 8.6%. Notwithstanding the decline in insurance prices in the US market in 2008, particularly in the commercial insurance segments, the premiums increased for all Republic's segments, especially due to the following factors:

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• Continued growth in the private segment, private property insurance in Texas and Louisiana and low-cost housing and apartment insurance plans, as well as further growth in premiums in Mississippi, Arkansas and Arizona due to the acquisition of two established agencies in general insurance. • Satisfactory customer retention in the commercial segments together with rigorous growth in Louisiana and Mississippi. Despite the decline in market prices in 2008, an increase of 8.5% was recorded in Republic's commercial segments, in part due to expansion of the market for the company's products. • The Program Management segment increased by 10.1% due to the regulatory approval to expand the insurance plans in the workers compensation segment – for loss of work disability insurance and other related expenses) in California. This plan, together with the new car insurance plan, helped to offset the market status through a number of small commercial customers. The total premiums (residual) earned by Republic in 2009 amounted to USD 365.2 million compared with USD 375.2 million in 2008 and USD 319.5 million in 2007, in other words, an decline of 2.7% in 2009 compared with an increase of 17.4% in 2008. Notwithstanding the significant increase in premiums recorded in 2009, the residual premiums earned decreased due to converting a large plan in the Program Management segment to a plan that is entirely covered by reinsurance. This change led to a decline in Republic's total recorded premiums of an amount of USD 60.2 million in 2009, and a total decline of USD 29.1 million in residual premiums earned. Nonetheless, the increase in the California work compensation plan offset the loss of premiums recorded and exceeded it. The work compensation plan is partially covered by reinsurance and in view of the rapid growth, the residual premiums increased by USD 12.2 million only. Another factor that affected the residual premiums in 2009 is the continuing high cost of reinsurance in the geographic region in which Republic operates. As noted with regard to 2008, the reinsurers incurred significant losses due to hurricane damage in Texas and Louisiana. Subsequently reinsurance rates increased significantly in 2009 and it is expected that they will continue to be high in 2010 for coverage connected to climatic disasters. Furthermore, following the hurricanes in 2008 and the capital market crisis, Republic entered a reinsurance program based on a quota share of 20% for private and commercial segments as a way to lever additional underwriting in the event of future loss due to catastrophe. This program reduces the scope of residual premiums that the company earns. For further information pertaining to reinsurance see section 1.1.6 below. Despite the high costs of reinsurance, including the quota share program, and the cancellation of several insurance plans, growth continued in other business lines and other programs together with increased premium rates, which is intended to help compensate for the high costs of reinsurance and the residual premiums declined by 2.7% only. Republic's underwriting operations continue to show good results in its core business, net of the impact of irregular weather events. The results of the investment in 2009 of USD 36.8 compared with USD 9.3 in 2008, is significantly higher due to profits on investment in the amount of USD 22.2 in 2009 deriving from the sale of securities under good market conditions, compared with loss recorded for impairment in the amount of USD 13.4 in 2008. Profit on interest and dividends on investment amounted to USD 16.6 in 2009, a decrease compared with USD 22.5 in 2008 due to lower interest rates and less positive opportunities for reinvestment of the moneys from the sale of securities. It is noted that Republic is not exposed to sub- prime investment instruments and that to date all its investments in debentures continue to receive the interest and the principal. Other revenues represent mainly revenue from insurance fees and other income. Fronting fee income in 2009 amounted to USD 8.5 million compared with USD 8.8 million in 2008. In addition, the other revenues include net commissions and revenue from insurance fees from two MGAs owned by the Company generating business for nonaffiliated insurance companies, which amounted to USD 4.3 million in 2008. Other revenue includes income from installment payment fees and commissions related to other services. Republic's net profit in 2009, as recorded in the Group's reports, amount to USD 9 million compared with net loss of USD 44 million in 2008. Most of the improvement in net profits refers to investment profits in 2009 and the absence of losses related to hurricanes.

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Nonetheless, weather related losses continue to impact Republic's results: Even though the United States was not hit by hurricanes in 2009, the losses due to hail and wind were higher than average in the past. In 2009, ten hail and wind storms were recorded, causing Republic losses in excess of USD 1 million per storm. This is in comparison to 16 of these type of events in 2008. Nonetheless, this figure is still much higher than the historical average. The foregoing also includes the fierce hail storm that hit a large city in Western Texas in 2009, a location were this type of storm is rare. This storm caused losses in the amount of USD 20 million. The total weather related losses in 2009, before reinsurance, amounted to USD 80.5 million and USD 56.7 million after reinsurance. This is compared with USD 241.0 million before reinsurance in 2008 and USD 78.7 million after reinsurance in 2008. During these two years, much higher sums are recorded compared with 2007, when the losses from weather events amounte4d to USD 2701 million and USD 22.3 million, before and after reinsurance, respectively. The non weather related loss ratio increased from 55.9% in 2008 to 57.9% in 2009. The increase derives mainly from increased losses due to fire which apparently are mostly related to the general economic situation. In view of this, Republic decided to terminate several unprofitable plans and will implement new underwriting tools to try to minimize non weather related losses. Republic's net loss in 2008, as included in the Group's financial statements, amounted to USD 47.2 million compared to net profit of USD 28.8 in 2007. The net loss in 2008 can be attributed to large losses related to weather, storms (hail and tornado) and the rare case of four tropical storms that hit in the third quarter of 2008 in the region in which Republic operates (three hurricanes and one tropical storm). Two of the hurricanes (Gustav in Louisiana and Ike in Texas) were large hurricanes and Hurricane Ike is considered to be the third largest hurricane in US history in terms of insurance losses (after Katrina [2005] and Andrew [1992]). Although Hurricane Ike was a category 2 hurricane (out of 5 categories), it crossed the area containing the fourth largest population in the US and therefore it caused much more damage than other storms. The projected losses for Republic as a result of these hurricanes, before reinsurance, are expected to reach USD190 million. However, the net loss after reinsurance is estimated at USD 44 million and is recognized in the financial statements. In addition, after the two large hurricanes, Republic paid USD 20 million for reinstatement and rehabilitation cover in the framework of its reinsurance for catastrophes as protection against further hurricanes in the fourth quarter. The effect after tax of the losses caused by the hurricanes and further reinsurance premiums is USD 39 million. It is noted that, the force and frequency of weather catastrophes were extremely exceptional in 2008, and the damage to Republic was similar to that of other property insurers in the USA. Despite the exceptional losses caused by weather damage in 2008, the loss ratio (losses from claims in relation to premiums earned) without the weather catastrophes, amounts to 55.9% - only slightly higher than the loss ratio in the previous three years, without weather catastrophes. The net loss for 2008 was also affected by losses due to impairment in the amount of USD 13.4 million with respect to investments of USD 20 million (based on US GAAP) pertaining to goodwill. Assets allotted to the various segments on December 31, 2008 and 2009 (according to US GAAP1, in millions of US dollars: 2009 2008 Personal insurance 390.1 411.1 Commercial insurance 263.5 265.8 MGAs 499.9 441.7 Insurance services 368.1 295.5 Consolidated 1,521.6 1,414.1

The increase in consolidated assets is recorded after the internal increase in all segments as described above for gross premiums.

1 The total assets assigned to segments under the US GAAP do not differ materially from the total assets under the IFRS.

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B. Legal restrictions, standardization and special constraints 1. Regulations applicable to the Republic Group due to its holdings in insurance companies and agencies: Republic Group is the parent company of several insurance companies and agencies and is subject to the laws of the states in which these companies are registered, in particular, Texas, Oklahoma and Arizona. In general, these laws require registration at the insurance departments of the states and reporting of the operations of the Group's companies. Furthermore, material transactions between the Group's companies including the reinsurance and insurance services agreements, are required to be fair and reasonable, and if these are material transactions or of specific categories, then they also require prior notice and approval from the local insurance department. 2. Changes of control: Insurance companies are subject to provisions limiting the acquisition or transfer of control. A potential buyer interested in acquiring control of an insurance company or agency requires prior written approval from the insurance department of the state in which the insurance company or agency is registered. The approval takes into consideration factors such as the financial strength and plans of the applicant. In view of the aforesaid, Republic Group is not free to sell and/or transfer control of the companies it controls without receiving the appropriate approvals, and even control changes within Republic itself cannot be made without the appropriate approvals. 3. Association of Insurance Commissioners: The National Association of Insurance Commissioners (“NAIC”) is an organization formed by insurance commissioners of the states to discuss and formulate policy in respect of regulation, reporting and accounting for insurance companies. NAIC has no legislative authority, however it is influential in determining the insurance laws of the various states. The association published recommendations for laws and regulations presenting minimum standards for regulation of insurance. Most states have adopted these recommendations in state legislature, including the NAIC rules for minimum capital in respect of their investments and operations. Pursuant to the Sarbanes-Oxley Act of 2002, the association proposed additional standards for insurance companies, such as corporate management transparency, auditor independence and especially the application of part of the provisions of Section 404 of the Sarbanes-Oxley Act regarding internal control of financial reporting. These requirements will come into effect in 2010. 4. Legislative and regulatory changes: From time to time, legislative and regulatory changes have been proposed that could adversely affect the insurance industry. Among others, the proposal of a federal insurance law is under discussion, in addition to the current state laws, as well as proposals to conform parts of the state legislature to NAIC regulations. Most of the legislators in the various states commenced work in early 2009, and many bills are on the table, which might affect insurance companies, including rates supervision and non-binding market structures. It is not possible to foresee which proposals will be adopted, what their content may be and what effect they will have on Republic Group's operations. 5. Restrictions on policy terms: In 2002, in response to decline in the some of the insurance and reinsurance markets following the terror attacks on the World Trade Center in New York, the Terrorism Risk Insurance Act (TRIA) was enacted. This law established a federal assistance program aimed to help the commercial insurance industry to cover claims relating to future terror-related losses and requires the insurance companies to offer underwriting cover for damages and losses caused by certain terror acts. As a result of this law, Republic Group is required to include damages caused by acts of terror in its insurance policies. In December 2007, TRIA was extended until the end of 2014, with certain modifications. Future federal and state legislation relating to insurance or reinsurance of terrorism may have an adverse effect on the revenue or financial position of Republic Groups. 6. State regulation: The state insurance commissioners in the United States have broad powers to regulate the operations of insurance companies. The main purpose of this regulation is to protect the policyholders. The extent of regulation varies from state to state, and could include, for example, business licensing, accreditation of reinsurers, supervision of business integrity and approval of policies and premium rates. Regulation also includes the obligation to file financial statements prepared in accordance with the accounting principles and requirements of the insurance departments for their audit. As part of their broad authority, state insurance commissioners may determine interim regulations for local issues or events. For example, after Hurricane Katrina the state of

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Louisiana prohibited insurance companies from canceling insurance policies for a period of time due to nonpayment of premiums by the policyholders. 7. Periodic audits by state departments of insurance: The state departments of insurance may conduct periodic audits for any purpose, such as review of the insurance company’s financial position, operations and transactions with related parties. 8. Statutory Accounting Principles (SAP): The objective of SAP is to assist insurance commissioners in supervising the solvency of insurance companies. Unlike GAAP, these principles focus on valuation of the assets and liabilities of the insurance company in accordance with the relevant insurance laws. SAP, adopted, in part, by insurance commissioners in Texas, Oklahoma and Arizona, determine, inter alia, the retained earnings of Group companies and therefore also have an effect on the dividends they are allowed to distribute. 9. Restrictions on dividend distribution: In Texas and Oklahoma, approval is required from the department of insurance for distribution of dividends, if the dividend, together with all the dividends declared or distributed in the preceding 12 months, exceeds the greater of: (1) 10% of its regulatory capital or policyholders' surplus (which is the SAP equivalent of GAAP shareholders' equity) on December 31 of the prior year; or (2) 100% of the statutory earnings for the calendar year preceding the year in which the dividend distribution is being determined. The insurance department in Arizona must approve distribution of dividends if the dividend, together with all the dividends declared or distributed during the preceding 12 months, exceeds the lower of the following: (1) 10% of its regulatory equity on December 31 of the prior year; or (2) 100% of its net investment income for the calendar year less capital gain. Furthermore, all subsidiaries and affiliates in the Group may only distribute dividends only out of their retained earnings. It is noted that there are also contractual restrictions prohibiting Group companies from distributing dividends if they are in breach of terms of debentures or loan contracts. 10. Guaranty associations: In Texas, Oklahoma and Arizona, and in other states, property and casualty insurers are required to participate in guaranty association that payments to policyholders on account of liabilities of insurance companies in default. 11. Participation in involuntary risk plans: Similar to guaranty associations, Republic Group is required to participate in involuntary insurance plans for individuals and entities which otherwise would be unable to afford insurance, and to set aside funds for these plans. At the report date, to the best of Republic's knowledge, it is not in breach of any of the applicable laws. C. Changes in the scope and profitability of operations in the sector The property and liability insurance sector is cyclical in terms of fluctuations of both pricing and availability of insurance cover. Markets with surplus insurance capital may experience fierce price competition, provision of overly-extensive insurance coverage, erosion of insurance discipline and deteriorating operating results. Such market conditions would typically lead to a period of reduced coverage, after insurance companies leave fiercely competitive and unprofitable product lines or reduce their operations. Insurance companies would then assume greater insurance discipline, while increasing premiums and issuing insurance policies with more restrictive terms. The insurance market in general does not necessarily operate in this or any other specific manner, and sometimes a certain segment may ebb while another segment peaks. The Group endeavors to minimize the impact of cyclical fluctuations described above by expanding its operations into geographic and demographic segments where competition is weak and where there is a lower supply of insurance services and products. In 2004 and 2005, the property insurance market was significantly impacted by hurricane damage, including Hurricanes Katrina and Rita which significantly impacted the regions in which Republic Group operates (for further information in this matter see Section 1.15.19 below. In 2008, in Texas and Louisiana there was a rare occurrence of four tropical weather events, including three hurricanes, Ike, Gustav and Dolly, all in the third quarter of 2008, and this was after record weather damage (hail and storms) in the spring of 2008 in Texas and Oklahoma. Between 2003 and 2007 the Republic Group regained profitability due to several initiatives including redesign of the personal product line, re-underwriting of the commercial insurance industry, the new MGA plans and a focus on semi-urban, rural and small- to medium-sized metropolitan markets. However, 2008 was a turbulent year with record weather damage, combined with the global economic crisis, which had a significant effect on the value of the

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investment portfolios resulting from the underwriting and operating losses of many insurers. The global recession continued in 2009. While the financial markets recovered in 2009, unemployment remained high and consumption has not yet returned to previous levels. Weather related losses were higher than average and non-weather related losses increased as a result of suspect fire and liability claims. Republic is taking measures to change the mix of its operations in order to vary and spread the focus on property insurance to types of insurance that focus on liability, aiming to balance its insurance portfolio. These measures are evident in the significant increase in work compensation plans in the Program Management segment. The continuation or deterioration of the economic crisis in 2010 or beyond, may adversely affect the operations of insurance companies, including Republic. The implications of the economic crisis include higher unemployment, business and private bankruptcies, foreclosures on assets, damage to the financial robustness of reinsurers and reinsurance capacity, and an increase in reinsurance premiums. All these could have negative implications on the scope of activity and its profitability. D. Market developments The most significant development in the past year was the deep recession in the financial markets. Despite the stabilization of the financial markets in 2009, volatility continues and projections with respect to the insurance sector continue to be low. This situation continues to affect the insurance sector in terms of the value of investment portfolios, harm to investments, lower yields, less liquidity, harm to intangible assets and goodwill, and limited access to capital markets. Unemployment and the many bankruptcies affect the premiums, and indirectly also the damages, as a result of the higher moral risk (the risk that the policyholder will cause a fraudulant or unlawful insurance event). Though no hurricanes occurred in North America in 2009, the substantial effects of the two large hurricanes, Ike and Gustav, and the smaller hurricane Dolly, that occurred in 2008, on the results of Republic's operations continues, and are seen in higher reinsurance premiums Historically, after large weather catastrophes, reinsurers have been able to raise additional capital from public offers for sale. However today, in view of the crisis in capital markets worldwide, the only source of capital is from organic growth through higher reinsurance premiums. Even though access to new capital is more limited, the insurance sector manages to maintain a high level of capital. As a result, insurance premiums continue to be low, competition is fierce and the pressure on insurance discipline is high. Most market surveys do not foresee changes in these market conditions until 2011 and beyond. E. Key success strategies and changes taking place in the industry The highly competitive and intensely regulated insurance industry is divided into numerous insurance branches and different insurance populations. Republic Group regards the following as critical success factors in its sector of operations: 1. Know-how and experience – Operating an insurance business requires, among others, extensive familiarity and ties with different entities operating in the area, including MGAs and independent insurance agents, a solid reputation with policyholders and a deep understanding of the market conditions. In view of the above, know-how and experience in the sector of operations are critical success factors and Republic Group relies on its many years of experience and know-how in its areas of operation. 2. Focus on less-competitive insurance segments – In view of the competition in the insurance industry, including with major insurance companies who possess greater resources than Republic Group, a focus on under-served insurance markets that have been neglected or ignored by larger companies and where Republic’s local knowledge allows Republic Group to compete more effectively against its larger competitors. 3. Reducing operations in competitive segments – Reducing operations in segments or products where other, stronger insurers are active (such as auto insurance), and expanding operations in segments where the company has a competitive advantage (such as homeowners). F. Main entry and exit barriers of the sector of activity and changes therein The key entry barriers to the industry are the various licensing requirements, greater equity requirements, the need for establishing marketing systems or communication systems with other agents, and reputation. The main exit barriers are long-term commitments to

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policyholders, commitments to insurance agents and companies receiving insurance services from the company, approval of the state insurance department for transfer of control in insurance companies and for withdrawal from certain product lines or geographic areas (the state insurance departments may attempt to limit a company’s decision to stop insuring damages in coastal wind torn regions. G. Substitutes for products in the sector of operations and changes therein Substitutes for Republic Group products are mainly similar products from other insurance companies. The main differences between insurance products from different companies generally involve the cover and premium, and the service provided in the underwriting and claim processes. H. Structure of competition in the sector of operations and changes therein Republic Group competes with many companies in its product lines. The personal insurance market in Texas is dominated by a few large insurance companies (including their subsidiaries and affiliates), i including State Farm, Allstate Farmers, LibertyMutual/Safeco, USAA , Central Mutual, Hannover Harford and Travelers. In the commercial market, Republic Group competes, inter alia, with In the commercial market, Republic Group competes, inter alia, with Allied, Cincinnati, America First, , Hanover, Liberty Middle Market, Travelers, Union Standard, Harford Central Mutual, CAN, Zurich and UBI. Republic Group usually controls 1% of the market sector in Texas. Republic Group has three direct competitors in the MGAs market – Praetorian, Delos and Assurant. The insurance services market has several competitors, including State National Companies, Old American County Mutual Fire Insurance Company, Consumers County Mutual Insurance Company and Home State County Mutual Insurance Company. Competition is based on pricing, offered cover, customer service, agent relations (including ease of doing business for agents, service provided to agents and commissions paid to them), size and financial robustness. Republic Group seeks to distinguish itself from its competitors by providing a broad product line and focusing on markets where competition is relatively weak. The company deals with competition in its areas of operation by fostering good, long- term relations with insurance agents and MGAs, know-how and experience in areas where it operates and its reputation with policyholders. Republic Group also offers flexibility due to its licenses and charters, which include a wide range of insurance activities. 1.13.2 Products and services The Republic Group has four major insurance segments: A. Personal In this segment, Republic Group sells insurance policies to individuals through independent insurance agents and three affiliated insurance agencies. Insurance policies include homeowners, fire and low-value dwelling insurance, standard and nonstandard auto insurance and personal umbrella policies. Policyholders are located in Texas, Oklahoma, Louisiana, New Mexico, Mississippi and Arkansas, while special car insurance is also marketed in Arizona, Oregon and Utah. Republic Group focuses on geographic and demographic areas where the competition is relatively low. 1. Personal property and building insurance: Insurance against various damages, including damage to the home, possessions inside the home, garages and other buildings on the property; fire insurance against damage caused by fire, lightening, windstorms and hail, collapse of buildings and damage caused water- or electricity-related accidents. Republic Group's low-value dwelling insurance generally provides more limited cover, up to $200,000 (not including cover of household possessions). 2. Standard auto insurance: Standard auto insurance policies insure against bodily injury and physical damage to the vehicle. The cover is limited to $500,000 per policy, but the average overall cover of the policy is less than $100,000. This insurance is primarily marketed to policyholders who purchase other insurance cover from the company, such as property and homeowners insurance. 3. Nonstandard auto insurance: Nonstandard auto insurance policies cover bodily injury and physical damage to vehicles whose owners have driving records making it difficult for them to purchase standard car insurance, and are therefore required to pay higher than average premiums. Most nonstandard risks amount to $50,000 or less. Republic terminated its internal plan for nonstandard auto insurance in 2009 due to the low results of the plan. Nonetheless, nonstandard auto insurance is still marketed by Republics affiliated MGAs.

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4. Personal umbrella insurance: Umbrella insurance policies offer additional insurance cover beyond the limits of homeowner and vehicle insurance. Most umbrella policies are limited to USD 5 million – 95% of the risks involved are ceded to reinsurers. B. Commercial In this segment, Republic sells insurance to small- and medium-size businesses through independent and affiliated agents who underwrite farm and ranch businesses. The policies include, inter alia, auto, workers' compensation, property insurance (real estate), general liability and umbrella insurance, and farm and ranch insurance. Republic Group focuses on markets where competition between insurance companies is relatively limited, such as garages, family restaurants, light industry and artisan contractors. 1. Property insurance: Insured properties are limited to a maximum property value of $20 million and insurance is not available for properties where the risks involve residences, such as apartments and hotels. 2. Liability insurance: Commercial liability insurance provides third-party liability cover for businesses, including bodily injury, medical payments and fire damage. This policy is limited (less reinsurance) to $1 million per insurance event. 3. Commercial package: The commercial insurance package is a combination of property and liability policies. 4. Auto insurance: Commercial auto insurance policies insure against bodily injury and physical damage to vehicles, and may be expanded to include medical payments, car rental and more. The policy is limited to $1 million per insurance event. 5. Workers' compensation insurance: The insurance provides employers with cover in order to meet statutory workers' compensation benefits for workers who are injured on the job. 6. Umbrella insurance: Commercial umbrella insurance provides additional liability insurance for businesses beyond the limits of standard insurance cover. Most umbrella policies are limited to USD 5 million and 95% of the risks involved are ceded to reinsurers. 7. Farm and ranch insurance: These policies are designed to insure the special needs of farm and ranch owners, and provide cover for dwellings, farm structures, equipment and liability. In addition to Republic Group's regular areas of operation, these policies are marketed in other states including Arkansas, Kansas, Mississippi, Missouri, Montana and Nebraska. One large farm and ranch plan was terminated in 2009 due to low results. Supplementary reinsurance, in addition to the limit of Republic's reinsurance plan, was acquired for specific agents. C. Program management In this segment, unlike insurance business distributed through independent agents, Republic Group markets personal and commercial policies through contracts with unaffiliated MGAs. The MGAs have the capacity and authority to offer policies that they underwrite, subject to specific guidelines set by the Group and these policies are binding on the Group. Republic Group uses the term :program" to describe an agreements with an MGA according to which the Group provides the MGA with an insurance product that is customized for a distinct customer segment that generally does not meet the risk profile of standard insurers. Republic Group requires MGAs to sell the policies according to its guidelines. MGAs provide policyholders with the services provided by a regular insurance company, including underwriting, billing and claims administration, however they are prohibited by law from issuing their own policies. 1. Agreements with MGAs: MGAs issue insurance policies under Republic's name and therefore Republic is liable for the insurance risk. At times, Republic cedes part of this insurance risk to reinsurers. In both cases, Republic is directly liable to policyholders. In addition to bearing all or part of the insurance outcome of each program, Republic may receive a fronting fee from the MGAs or from the related reinsurers. MGA commissions are based on the program profitability. Relations with MGAs are based on years of experience and familiarity with products, markets and marketing of the programs. MGA agreements are generally for a one-year term and are automatically renewed annually, unless one of the parties chooses to terminate them with 90 – 180 days prior notice. Republic operates various control mechanisms for overseeing the MGA's operations: It receives monthly reports from MGAs and conducts, at minimum, semi-annual audits of each program to assess their compliance with guidelines provided.

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2. Insurance products: Insurance policies sold through MGAs include commercial auto insurance, commercial liability (for small business), prize indemnification (nonpayment of prizes awarded to a participant in a contest or sports event), loan insurance and collateral and employers’ insurance. 3. Reinsurance: Reinsurers are all high ranking supplementary insurance companies and/or companies willing and able to provide letters of credit or trust account information to secure the amounts of their reinsurance. D. Insurance services and corporate In this segment, Republic Group provides insurance services to national and regional insurers that wish to use the company's charters and licenses to access insurance markets in Texas and other states. According to the agreements with the insurance companies, Republic underwrites risks that are entirely ceded to the carriers in exchange for a fee. In other words, Republic does not bear the risk involved in these policies as long as the insurers meet their obligations towards the company, and in effect it could be said that that the company has full reinsurance. Nonetheless, the company is directly liable towards its policyholders. Most of the insurance policies sold under these agreements are personal and commercial auto policies. The company limits its agreements to insurers rated A- or higher by A.M. Best rating company or companies with a lower rating or with no ratings but which provide sufficient collateral. Republic Group also includes in this segment the income from the general agencies it owns for its transactions with insurance companies which are not affiliated to it. In the results for this segment, Republic Group includes interest expenses for its debt as well as other unallocated income or expense. 1.13.3 Customers Personal: Policyholders are private individuals. Commercial segments: Policyholders are small to medium commercial enterprises and businesses, typically in service segments such as garages, family restaurants, light industry and artisan contractors. Program management: Policies are marketed by unaffiliated insurance agencies (MGAs). Policyholders include private individuals and businesses. Insurance services: These policies are marketed on behalf of Republic Group by unaffiliated insurers rated A- or higher by A.M. Best rating company, or companies with a lower rating or with no ratings but which provide sufficient collateral. Policyholders include private individuals and businesses. About 63% of Republic's insurance policies are issued in Texas. Many customers reside in rural areas, in relatively small towns with a population of no more than 100,000. At present, about 20% of the premiums come from California, through MGAs, as a result of the workers compensation program. 1.13.4 Marketing and distribution Personal and commercial: Republic's standard insurance products are marketed through a broad network of independent agents and MGAs. Independent agents do most of the marketing in the personal and commercial segments. The agents have no discretion as to the policy terms and they offer the policies provided by Republic. Republic prefers to maintain long-term relationships with insurance agents and agencies and more than a third of the agents have worked with Republic for 10 years or more. Republic Group has a network of over 600 independent agents in the personal and commercial segments. Republic Group’s marketing strategy focuses on segments where competition in the insurance market is relatively weak - mostly segments that cannot afford the premiums of other insurers and segments with rural or small to medium-sized metropolitan markets, which other insurance companies are not willing to develop and/or do not recognize as revenue potential. Furthermore, the company tries to market its range of products to policyholders who already own one or more of its products. In 2009 Republic's largest independent agency was responsible for less than 1% of the company's gross premiums. MGAs and insurance services: Underwriting in the MGAs segment is through nine unaffiliated MGAs. Insurance services are provided to nine unaffiliated insurers and additional earnings come from three affiliated MGAs. In 2008 and 2009 Republic's largest MGA was responsible for 23.3% and 10.1% of the total premiums, respectively. The largest MGA was responsible for 13.5% of the total premiums for same year, nonetheless, Republic's contract with this MGA was amended in 2009, according to

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which Republic will no longer keep residual premiums in the program management segment but will continue to provide services for a fee in the insurance services segment. Accordingly, this MGA produced only 5.7% of Republic's total premiums in 2009 and minimal premiums can be expected from this MGA in 2010. One program in the insurance services segment accounted for 19.3% and 17.8% of gross premiums for 2009 and 2008, respectively. However, since this program is completely covered by reinsurance, no net premium is produced. Republic Group's product development and marketing strategy is based on dialogue and constant consultation with agents and agencies, MGAs and insurers marketing the company’s products in different segments. This strategy allows the Group to learn from the agents about market needs and to issue policies that at times cover risks not covered by the competition. 1.13.5 Seasonality The risks insured by the Group generally exhibit higher losses in the second and third quarters of the year, due to a seasonal concentration of weather related insurance occurrences in the geographic region of operation. Although weather-related losses (including hail, windstorms, tornadoes and hurricanes) can occur during any quarter, historically the second quarter has the highest frequency of such weather events, causing losses that are not covered by reinsurance (for example, hurricanes are more likely to occur in the third quarter, however losses caused by them tend to be covered more by reinsurance). Weather related damage from windstorms and hail were higher than average in the second quarter of 2009 and 2008, accounting for (before and after reinsurance) USD 33.2 million and USD 29.6 million in 2009 and UD 39.1 million and USD 28.3 million in 2008, respectively. The main difference between the years was the lack of aggregate reinsurance in 2009 for more frequent weather related occurrences and the lower extent of damage caused by these occurrences compared with hurricanes. Aforesaid reinsurance for earlier years covered up to USD 10 million, however was not available at a reasonable price in 2009. In 2009, Republic's net loss caused by weather related damage (after reinsurance) was the second highest in the company's history, following the greater losses in 2008, when three hurricanes hit Republic's region of operation and caused record weather related damage in Texas. Though hurricanes are not common in Republic's region of operation, they can cause much damage. Hail storms do not usually affect large areas as do hurricanes, but they can cause extensive damage, as occurred late in the season by the non-typical storms in western Texas. This event in September 2009 caused damages amounting to USD 28.6 million before reinsurance, and USD 20 million after reinsurance. Whereas all the product lines reflect seasonal losses, the private segment is most significantly affected by such seasonality. The Group purchases reinsurance to protect itself against the high frequency and severity of insurance occurrences related to the weather. Nonetheless, the cost of reinsurance increased in 2009 following the large storms of 2008 and scope of deductibles increased due to the lack of aggregate reinsurance, which in the past provided protection against the smaller more frequent occurrences. 1.13.6 Reinsurance1 Republic purchases reinsurance in its independent insurance business to reduce its exposure to insurance risks. The company also participates in material reinsurance agreements in its management plan and in the insurance services segment, based on its estimate of the potential risk and the premium leverage requirements. Republic's private and commercial segments are protected by reinsurance against weather related catastrophes. In 2009 Republic's aforesaid contractual reinsurance compensated for single-loss events up to an amount of USD 275 million, with a residual amount of USD 15 million. In 2009 Republic raised the amount of single loss events

1 For information pertaining to types of reinsurance see footnotes in section 11.27 above: Contractual reinsurance between insurance companies and reinsurers is carried out under a reinsurance contract according to which the reinsurer accepts, under agreed conditions, all the risks / transactions sent to it by the direct insurer, without necessitating approval for each risk / transaction separately. Contractual reinsurance is divided into the relative reinsurance, whereby the risk (claim cover) is split into equal premiums and non-relative reinsurance whereby the risk (claim cover) covered by the reinsurer is not directly proportional to the division of premiums. Relative reinsurance is divided into quota share, whereby the reinsurer covers a fixed percentage of claims in a specific sector in return for an equal share of the premium, and surplus, whereby the reinsurer covers a variable percentage of each claim up to a fixed maximum in return for an equal share of the premium. Non-relative reinsurance is split into excess of loss, according to which insurance cover is provided for individual claims whereby the direct insurer covers aggregate damages up to a fixed residual amount and the reinsurer covers the excess amount; and a stop loss contract whereby the reinsurer compensates for a preset amount / percentage of the claimed amount. Other than contractual reinsurance, there is also facultative reinsurance which is split among several reinsurers.]

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to USD 300 million and the residual amount to USD 20 million per event [please check]. Republic's private and commercial segments are protected by excess of loss reinsurance contracts and facultative reinsurance. The private, commercial and program management (MGAs) insurance segments are also protected by relative contractual reinsurance. As noted above, the insurance services segment operates in a manner whereby insurance payments to policyholders are fully (100%) backed by reinsurance covered by the insurance companies providing the insurance services in return for the fronting fees that Republic receives Republic's reinsurers have an impact on its insurance capacity, insurance terms and tariffs and profitability. Reinsurance does not exempt Republic from its liability to policyholders under the insurance policies, it only grants the company the right to demand that its reinsurers reimburse it for its losses, and therefore the robustness of the reinsurers may impact the business results of insurance companies. For further information relating to the reinsurance impact on Republic's operations, see Section 1.15.19, which describes the reliance on them with regard to damage caused by hurricanes hitting the United States in 2008. Due to the global financial crisis, the number of reinsurers and their equity began to decline, which could cause a decrease in capacity as well as a drop in rating indicating damage in the robustness of reinsurers against the backdrop of heavy losses in the assets portfolios and the material deletion of equity. However, it is noted that the scope of Republic’s reinsurance for 2009 has not changed materially, but an increase in reinsurance prices has been recorded. Republic's reinsurance program for weather related catastrophes and excess of loss contract for all risks in 2010 is similar to its program for 2009 from the aspect of cover and price. In 2009, Republic entered a 20% quota share reinsurance program for its private and commercial insurance segments. The objective of the quota share program is to provide underwriting flexibility and leverage resulting from continuous increase in other segments and in view of projected capital inadequacy in the event of huge losses following several large-scale catastrophes. Republic Group chooses its reinsurers according to their financial robustness, operating and payment history and overall reputation. The Group contracts with a large number of reinsurers to minimize risk involved with failure of any reinsurer to meet their obligations. The Group only contracts with reinsurers rated A- (Excellent) or higher byA.M. Best rating company or with reinsurers rated lower, on condition that they provide additional collateral. If a reinsurer’s rating drops below A-, Republic will replace the reinsurer or require external collateral, such as a bank guarantee. As at December 31, 2009, approximately 89.6% % of Republic's reinsurance was covered by reinsurers rated A- (Excellent) or higher. The table below presents a summary of information relating to reinsurance in the various segments (in $millions): Commercial Segment Personal insurance insurance MGAs Insurance services 2009 2008 2009 2008 2009 2008 2009 2008

Gross insurance 221.3 210.6 132.0 131.6 268.1 269.6 289.8 218.3 premiums Reinsurance 60.8 46.0 41.7 28.2 192.4 151.1 289.8 218.3 premiums Share (%) 27.5 21.8 31.6 21.4 71.8 56.0 100 100 covered by reinsurance

The significant increase in 2009 is mainly due to the increase in reinsurance premiums, which aimed to protect the cover after the hurricanes in Texas and Louisiana. Most of the increase is attributed to the private segment as it represents the largest exposure to weather damages. Another element is the contractual program that covers 20% of the private and commercial insurance segments. The increase in the MGA segment derives from the fact that Republic's work compensation residual is much lower compared with the commercial vehicle liability / small business liability plan which terminated. The purchase of reinsurance for 2010 is yet to be concluded, however the scope of reinsurance in general is not expected to be materially different from that purchased in 2009. For further details relating to reinsurance, see Note 27 of the financial statements.

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1.13.7 Actuary Republic Group's liabilities include liabilities for reported losses, liabilities for losses incurred but not reported (IBNR), and liabilities for loss adjustment expenses (LAE)1 which are intended to cover the final cost of claim settlement, including claim investigations and legal defense. The extent of the liabilities for reported claims is based on estimated damage for such claims. The level of liabilities for losses incurred but not yet reported and for LAE is estimated on the basis of past damage costs, provisions of the policies and other factors. The process of estimating liabilities for losses incurred but not reported and loss adjustment expenses is an imprecise science and require significant judgmental factors and are influenced by factors that are subject to significant fluctuation. The Group uses actuarial models to determine its liability. Republic Group employs seven certified actuaries with an average of over 10 years of actuarial experience in the different insurance segments. 1.13.8 Property, plant and equipment Republic Group's head office is in Dallas, Texas where the Group leases a six-storey office building (with a total area of 10,500 square meters). All the Group's operations related to administration, finance, underwriting, information systems and other operations are conducted from the head office. Republic also leases a smaller area in an adjacent building for its claim management operation. The lease period is until February 28, 2017 with an option to extend it for a further five years. Rent are not material. Furthermore, the Group also leases offices for its subsidiary, RHP, in Houston, Texas. Republic Group uses several information systems. Among others, the Group uses the RepubLink system designed for its agents, allowing them to file Personal policies for the company’s approval and providing information relating to the policies, such as prices and other terms. The system allows the Group to collect and obtain data relating to policyholders, such as history of claims and premium payments. In 2007, the Republic Group completed the setting up of information systems for its commercial lines and for farm and ranch policies. The investment in information systems is a material expense and is expected to continue as such due to Republic Group's efforts to use new technologies for its customer services and to remain competitive in its operations. 1.13.9 Intangible assets Republic's intangible assets include trademarks as well as licenses and concessions to operate as an insurance company in the various states. 1.13.10 Human capital Organizational structure A. Republic's human resources – At December 31, 2008, Republic employs 413 employees, divided into the following departments:

Department Number of employees Bookkeeping / Finance / Accounting 34 Claims 72 Commercial insurance 73 Corporate services and billing 26 Underwriting and Actuary 23 Administration / Legal / Human resources 14 Information systems 60 Marketing 14 Personal insurance 35 Insurance program / insurance services 8 General agencies 65 Total 424

1 Loss adjustment expenses (LAE) are the estimated expenses for covering losses for claims filed but not yet concluded; these expenses are adjusted from time to time according to estimate of the anticipated loss.

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In 2006 and 2007, about 321 and 366 staff members were employed, respectively. The increase in human resources between 2006 and 2008 stemmed primarily from the acquisition of MGAs and the employment of 20 college graduates as interns and their placement in various operating segments as backup for the expansion of technological and underwriting initiatives required to support the geographical expansion into additional states which has led to a growth of 51% in premiums since 2006. There are no employer-employee relationships between Republic Group and the agents marketing its insurance products, other than the agents employed in the agencies owned by Republic. Republic Group has no employer-employee relations with agents marketing the company’s insurance products. B. Senior management and officers – Republic employs 30 officers, of which 13 are senior executives. The main gratuity paid to the employees is salary and periodic bonuses. Mr. Danny Guttman serves as president, CEO and chairman of Delek Finance US Inc., chairman of Republic, CEO and director in Delek Capital, and director in Phoenix Holdings, Phoenix Insurance and Barak Capital Ltd. Mr. Guttman holds 5% of Delek Capital shares after it allocated 94% of its share capital to Delek Investments in accordance with the allocation agreement of May 20061. The allocation agreement stipulates that the transfer of the Delek Investment shares in Delek Capital will be subject to Mr. Guttman's tag along rights and the sale of Mr. Guttman's shares will be subject to the approval of Delek Investments, so long as Delek Capital remains a private company and the management services agreement is valid and with first refusal option to Delek Investments if Delek Capital is a public company or the said management services agreement has expired. Furthermore, Delek Investments will be given the option to purchase Mr. Guttman's shareholding in Delek Capital for a period of 30 days from the termination of the agreement, according to the value of the shares to be calculated as set forth in the agreement. C. Compensation Plans Republic has employment agreements with certain executives. Apart from these, Republic's other employees are at-will employees, whose employment may be terminated at any time. Republic provides employee health and life insurance as well as savings plans, profit sharing and other compensation plans. Republic has two defined benefit pension plans that were frozen on December 31, 2003. In December 2006 and November 2007, several senior managers at Republic were granted options that are exercisable into Republic shares over a period of five years, in consideration of an additional variable exercise price over the vesting period as set forth in the terms and conditions of the options. Furthermore, a plan for the allocation of blocked shares (representing 0.5% of Republic's share capital) was also adopted. As at December 31, 2009 the fair value of the unvested shares was zero, since the projected performance for 2009 and 2010 will not lead to the vesting of these shares. The fair value of the options as at December 31, 2009 was USD 1.4 million. If the options will be exercised, Delek Capital's holding in Republic is expected to decline to 98%. 1.13.11 Investments Republic invests in solid investment channels such as government bonds, US state bonds, corporate bonds and mortgage-backed bonds. Republic's investments in fixed-income instruments, which form the majority of its investment portfolio, were managed in 2007 by the investment management company, Hyperion Brookfield Asset Management, Inc. (which manages assets of over $18 billion and specializes in insurance company asset management). Hyperion has the authority and discretion to buy and sell securities on behalf of Republic, subject to guidelines established by Republic's investment committee. Republic Group's total investments as at December 31, 2007, 2008 and 2009 amounted to USD 537.4, 1586.5 and 586.5 million, respectively. The investment portfolio produced positive returns in 2008 (although lower compared to previous years), notwithstanding the crisis in the capital markets, due to the relatively sound nature of the investments. As at December 31, 2009, the portfolio includes large cash and short term investment balances (USD 189.6 million) for reinvestment, due to a large number of securities sold in 2009 with the

1 The CEO of Delek Group holds the remaining 1% of Delek Capital's shares.

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intention of obtaining substantial gains because of market improvements. The cash balance is gradually reinvested in short term investments due to interest rate hikes. 1.13.12 Financing A. Republic has the following debt arrangements: Amount Interest rate at (in USD millions) December 31, 2009 Bank debt 34.0 2.24% Second-class loans 92.8 4.48% Other 5.7 4.0% Total 132.5 3.89%

The entire debt is a long-term debt. The table below presents details of the debt.

Effective interest Amount rate at December Basis for determining (in $ millions) 31, 2008 interest rate Maturity LIBOR interest for 1, 3 or 6 months + 2% or US Senior bank debt 34.0 2.24% January 2012 federal funds interest rate = 50% Second-class loans LIBOR interest for 3 10.3 4.28% September 2033 Principal I months + 4% LIBOR interest for 3 Principal II 20.6 4.13% months + 3.85% October 2033 thereafter LIBOR interest for 3 Principal III 20.6 3.45% December 2036 months + 3.2% LIBOR interest for 3 Principal IV 25.8 3.45% June 2037 months + 3.2% Fixed interest through September 2012, LIBOR Principal V 15.5 8.18% September 2037 interest for 3 months + 3.3% thereafter Total 92.8 Other debts Original issue 4.7 4.0% OID with 4% interest, Annual discount note 10% charge rate payments of $1.5 million until 2013 Payable bill .60 4.21% LIBOR interest rate for December 2011. acquired by merger one year + 3% of a partially owned subsidiary

B. Covenants Several covenants were fixed for the senior debt, which are set forth in section (A) above, including the following financial criteria: 1. Under USA GAAP Republic's minimum equity shall be USD 200 million. 2. The statutory capital of Republic Underwriters Insurance Company (RUIC), Republic's leading subsidiary, will be increased to USD 150 million. 3. RUIC's Risk based capital shall be at least 250% of the required capital. 4. The ratio of net premium to statutory capital will not exceed 2.5:1

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5. RUIC's combined ratio for the past four quarters shall not exceed 105%. 6. The fixed charges coverage ratio will be at least 1.25:1. In addition to the foregoing, provisions were added limiting creation of certain types of debt or attachments, limits on share issue and merger of certain assets, Distribution of dividends, business changes and so forth. C. Credit facilities Republic does not usually receive credit facilities, and finances its operations by means of equity and debentures. D. Credit rating A.M. Best rating company granted Republic an “A- (Excellent)” rating in 2003 and in December 2009, this rating was reconfirmed with a stable outlook. This rating is the fourth on a scale of 15 rating categories used by A.M. Best. The rating is intended, among other things, for the requirements of the insurance agencies and reinsurance companies signing agreements with Republic. E. Raising additional funds Republic estimates that it is able to meet its cash requirements for its ongoing business. Additional funding could be required if Republic elects to pursue acquisition opportunities in the future. 1.13.13 Taxation For details on taxation, see Note 42 to the company's financial statements. 1.13.14 Restrictions on and supervision of Republic’s operations See section 1.15.1.B above. 1.13.15 Material agreements Republic Group has agreements with various entities, including agents, agencies, MGAs, other insurers, reinsurers, credit providers and suppliers. Republic has no material agreements that are not part of its normal course of business. 1.13.16 Legal proceedings A number of petitions for class actions have been filed against Republic in connection with Hurricane Katrina. Many of the claims have been settled. For further information relating to the legal proceedings, see Note 31 to the company's financial statements. 1.13.17 Business objectives and strategy A. Focus on short-tail insurance segments: Republic focuses on short-tail insurance products1 (such as property and vehicle insurance) as compared with long-tail insurance products (such as product liability), because it estimates that that such products and their ensuing liabilities are easier to price, thereby reducing the fluctuations in the financial outcome. B. Focus on less competitive markets: Republic provides agents and MGAs with access to products and markets where larger insurance companies do not operate. As part of this strategy, Republic began issuing insurance policies for low-value dwellings and has entered the farm and ranch insurance business. C. Focus on areas where Republic has proven capabilities: Republic prefers to take advantage of many years of experience and know-how to focus on profitable products, areas and marketing channels, over entering unfamiliar markets. Republic also strives to develop relationships with new agents and MGAs in order to expand its business in desirable markets. Republic has over a century of experience in Texas and over 40 years in Louisiana, Oklahoma and New Mexico and it leverages its competitive advantage thanks to experience and reputation in these regions. D. Correct pricing of the insurance products, while taking into account the insurance market cycle: Republic attempts to price its business to generate underwriting profits by applying a high level of selectivity to the risks it accepts and it uses a risk-adjusted return approach to capital allocation.

1 Short-tail – Segments where the time elapsed between the insurance event and final assessment and payment are relatively short. Long tail – segments where the time elapsed between the insurance event and final assessment and payment are long.

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Republic allocates capital and other resources in its product lines in response to changing market conditions. Republic intends to expand product offerings in market segments that lack insurance capacity and high profitability, and to minimize product offerings in market segments where competitive conditions prevent the achievement of desired underwriting profits. Consequently, Republic expects some target market segments to vary from year to year. 1.13.18 Risk factors A. Exposure to weather catastrophes and damage As an insurance company, and especially in view of the geographic region where Republic Group operates, it is exposed to risks resulting from natural or man-made disasters, such as hurricanes, hail storms, tornados and fire. For example, the non typical hail storms in El Passo, Texas in September 2009, and hurricanes Ike and Gustav in September 2008, and Katrina and Rita in August and September, 2005. In addition, in 2008, wind, hail and tornado damages were the highest that were incurred in Republic's region of operation in decades and there were only light improvements in weather damages in 2009. It is difficult to forecast the occurrence of such events with statistical accuracy or to estimate the extent of the damage that may be caused. Losses from catastrophic events depends on various factors, including the exposure of policyholders in the area of the event, the extent of reinsurance and price rises, and unexpected changes in insurance cover due to regulatory or legal proceedings following a catastrophe. B. Incorrect pricing of premiums The outcome of Republic's operations depends, inter alia, on its ability to correctly price its premiums for a broad range of risks. Under-pricing by Republic Group may harm its profitability and on the other hand, over-pricing may harm its ability to compete and its turnover, therefore also harming profitability. C. Inaccurate assessment of liabilities for losses and loss adjustment expenses (LAE) Republic estimates its liabilities in order to cover the losses and loss adjustment expenses arising from its insurance policies. For this purpose, Republic Group is required to estimate claims submitted and liabilities for claims not yet submitted. Estimation of liability involves, by nature, uncertainties. Therefore, the actual losses and loss adjustment expenses for such losses which are payable by Republic may materially differ from its estimates. D. The collapse of reinsurers, change in reinsurer capacity and rates The Republic Group uses reinsurance to protect itself from insurance risks or to share them with reinsurers. Collapse of reinsurers, changes to reinsurance capacity and rates could harm the company's ability to pay policyholders or restrict its ability to underwrite insurance. In the insurance services segment, Republic issues policies on behalf of other insurance companies in return for fronting fees. The risk in this segment falls on those insurance companies, however if they are unable to meet their obligations to Republic Group, the Group may be liable for payment of damage without being indemnified. After the serious damage caused by the hurricanes in 2008, together with the general economic crisis in all the markets, reinsurance rates for 2009 have risen significantly and remained high for reinsurance in 2010. The reinsurers are required to rely almost exclusively on the higher rates in order to repay themselves the monies they lost following the hurricane damage and investment. The traditional sources of capital which usually flow into the reinsurance market after large losses are not presently available because of the changes in global markets. As a result of the higher cost of reinsurance and the capital loss, global capacity has also shrunk. This means that Republic's availability will lead to higher costs and less cover because of the higher attachment points. E. Reliance on independent insurance agencies marketing the Republic Group's products Republic Group's business relies on the success of independent insurance agents for marketing of its insurance products. These insurance agents also market the products of competing insurance companies, and at some stage they might prefer them, to the detriment of Republic Group’s sales turnover. Furthermore, customers may choose to purchase insurance through other marketing channels, such as the internet, and not from the insurance agents marketing the Republic Group's products. F. Reliance on MGAs Republic Group uses MGAs operating under its guidelines and their role is to issue policies on its behalf and to process claims for these insurance policies. Republic Group is exposed to the

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risk that the MGAs will abuse the authority given to them. Furthermore, MGAs may switch to competing companies or reduce their activity on behalf of Republic, for various reasons such as changes to rates or change of MGA ownership. One unaffiliated MGA accounted for USD 112.2 million in gross insurance premiums in 2008. This MGA was acquired by a third party in the third quarter of 2005. Following the acquisition, Republic entered into an agreement with the MGA to continue as the insurer. The agreement was changed and took effect in 2009. Under the fronting agreement, Republic continued to record certain premiums with 100% reinsurance. The program is expected to end in 2010. G. Downgrading of credit rating Financial strength ratings are important to the competitive positioning of insurance companies. Republic's insurance companies have been rated A- (Excellent) by A.M. Best rating company. This rating is subject to periodic review by the rating company. A lower rating may harm Republic's customer base and the willingness of independent agents and MGAs to contract with it. H. Stricter policy terms by courts or regulators Republic Group's insurance policies include various restrictions intended to limit the potential risk and liabilities of the Group. Determinations by courts of law or by regulators that such limitations are invalid may increase Republic Group’s liability and impact its financial results. I. Insurance market in Texas Since most of Republic Group’s revenues from insurance premiums are generated in Texas, the Group is exposed to events that have an adverse impact on the insurance market in this state, such as economic recession, political instability, unemployment, strict regulation, increased competition, war and terrorism. It is noted that the economic crisis could lead, inter alia, to a decline in the number of insurance policies taken out, a drop in insurance rates and an increase in the number of insurance events claimed by policyholders. J. Competition The insurance industry is extremely competitive. Republic Group competes with large insurance companies, including national insurance companies which have more extensive financial, marketing and management resources greater than those of the Group. Republic Group also competes with organizations implementing self insurance, mainly in the commercial insurance market. Another competitive risk to which the Republic Group is exposed is online marketing of insurance products. K. Poor performance of Republic Group's investments Republic Group's investments are subject to a range of investment risks, such as market financial conditions, market fluctuations, interest rate fluctuations, liquidity, credit and insolvency risks. Specifically, Republic Group is exposed to losses that could be incurred if the need arises for early exercise of securities to cover insurance liabilities. The severe crisis in the capital markets increased the risk inherent in the Group's investments. L. Regulation The Republic Group is subject to regulation and comprehensive supervision in states where it operates. Regulation covers a range of issues, such as restrictions on the company's investments and accounting and reporting standards. Changes to regulation or failure by Republic Group companies to comply with licenses and terms may have an adverse impact on its business. Other than the existing regulation, changes to legislation are proposed from time to time, which could have an adverse effect on the insurance industry. Inter alia, a proposed insurance act at the federal level, in addition to existing state laws, is currently being discussed, along with proposals to subject parts of state legislation to regulations adopted by NAIC. M. Information systems The Republic Group's operations are contingent upon the proper functioning of the information and communications systems on which it relies, among other things, to recruit new customers, for customer service, for filing claims and billing. A failure of the Republic Group's information system, or failure to upgrade it from time to time may harm the Group's operations.

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Impact of risk factors on Republic Group's affairs Major Moderate Minor Macro risks Negative events in the Poor performance of Republic's Unemployment insurance market in Texas, investments, due to exchange War and terrorism including economic rates, interest rates and inflation, recession and political among others instability Sector- Weather catastrophes and Regulation, including changes in specific risks losses regulatory capital requirements, Collapse of reinsurers, accounting principles or tax laws change in reinsurer Competition capacity, ratings and rates Risks specific Downgrading Actuarial issues, including incorrect Information to Republic assessment of liabilities for losses systems and loss adjustment expenses Incorrect pricing of premiums Dependence on insurance agents Dependence on MGAs The extent of the impact of these risk factors on the activity of the Republic Group is based on an estimate only and the actual impact may differ. 1.13.19 Events or issues outside the Group's normal course of business 2009 was a challenging year due to the continued economic recession which caused volatility of the financial markets (though improving), high unemployment, numerous personal and business failures and bankruptcies, low premiums and large scale asset losses and doubtful debts. Furthermore, the weather related losses continued to be higher that average. Even though no hurricanes hit Northern America in 2009, atypical and unseasonable hail storms occurred in usually dry regions in Western Texas and caused losses amounting to USD 20 million in September 2009. In response to the increases in the financial markets, in 2009 Republic decided to sell a large part of its securities for investment and to record profits on its investment. As a result, large capital reserves were created for its insurance subsidiaries. Nonetheless, future opportunities for income from investments was reduced until the markets stabilize further and the expected rise in interest rates. In 2008, there were two large hurricanes in the United States – Ike and Gustav. Hurricane Ike was one of the largest hurricanes ever to hit the United States and it had a significant effect on the insurance industry in Texas. This was a category 2 hurricane and it hit one of the most densely populated areas in the state causing a great deal of damage. Hurricane Gustav was a very large storm which hit more of inland Louisiana than the coastal areas. At this date, estimates of the losses caused by these storms amount to $160 million and $32 million, respectively. Another hurricane, Dolly, hit Texas shorelines in July and the damage it caused is estimated at approximately $9 million. Although the company's reinsurance plan provided most of the cover for the losses, the company's losses reached $42 million. Republic's net losses were significantly higher compared to those due to Hurricanes Katrina and Rita in 2005 because of higher reinsurance attachment points in 2008 when it was $15 million compared with $5 million in 2005. The higher attachment point was caused by the increase in cost of reinsurance after the 2005 hurricanes. These figures reflect the additional payment of $20 million in September 2008 for replacing the reinsurance cover for catastrophes in order to protect against the possibility of further storms in the fourth quarter. Furthermore, after the hurricanes of 2008, reinsurance rates for property insurance also rose significantly. In addition to the high tariffs for 2009, the availability of cover at possible rates declined significantly due to the absence of capital in the entire reinsurance industry. The traditional sources of capital are not presently available because of the economic situation and so reinsurance companies have raised their rates and reduced capacity. This means that the attachment points for reinsurance cover are much higher in 2009 than they were in 2008. 1.13.20 Anticipated developments in the coming year Republic Group intends to explore opportunities to expand its business in the geographic regions in which it operates and in other states, and to consider acquisitions that are consistent with its strategies. Following the large losses in 2008 after the storms, Republic applied for an increase in its premium rates in order to offset the expected high reinsurance costs. TThese costs became effect in the latter half of 2009 even though their full effect will be felt only in 2010. In light of the

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increase in the company's losses that are not related to weather, Republic's actuary team estimates additional price rises and these will be applied according to actuary justification. In addition the company applies new underwriting tools and regulations to increase its underwriting discretion pertaining to determining the insured's risks. Additional action was taken to reduce property exposure to hurricanes in certain coastal regions, as well as to reduce the risk areas in El Passo, Texas where increased losses were recorded due to hail storms during the past three years, even though in the past hail losses were not frequent. Republic will continue to monitor its capital allocations in an attempt to ensure efficient allocations which will focus on profitable underwriting opportunities.

1.14 Additional operations

The Group also conducts various operations that are not included in the above sectors and whose revenues and expenses are not material relative to the Delek Group's operations. These operations are included in the Group's financial statements at December 31, 2009 under Others, and include the following: 1.14.1 Biochemicals The Group holds 64.11% of the shares in Gadot Biochemical Industries Ltd. ("Gadot"), a public company whose shares are traded on the TASE. Gadot deals in the manufacture, marketing and sale of crystalline fructose for the food industry, as well as of citric acid, citric acid, salts and other products, primarily for the food, pharmaceutical and detergent industries, and since 2007, in the manufacture, marketing and sale of nutritional supplement ingredients. Gadot has three areas of operation: A. Fructose – The manufacture, marketing and sale of crystalline fructose and of tri-sodium citrate, which is a byproduct of the fructose production process. Most of Gadot's fructose sales are to Europe, for the food industry. Fructose (fruit sugar) is a monosaccharide (derived by separating sugar into its two components: fructose and glucose), and which undergoes various processes until it becomes crystalline fructose. The company produces crystalline fructose for the food and beverage industry as a premium sweetener – fructose has properties that make it preferable to sugar, such as a more concentrated sweetness and fruity flavor, and therefore it is used in the food industry, especially for candies, jams, baked goods, and other products. In addition, Gadot produces a citric acid known as tri-sodium citrate (TSC) from the glucose solution byproduct of the fructose manufacturing process, which is primarily used in the food and detergent industries. B. Citric acids and salts – The production of citric acids and salts (citric acid salts and phosphoric acid salts). Citric acid is produced in the west by a small number of large manufacturers and in China by several large and a few smaller manufacturers, who together produce a quantity equivalent to that produced by the large manufacturers in the west. Gadot produces citric acid which is used in the food industry (primarily in soft drinks) and as a raw material in the detergent and pharmaceuticals industries and for other applications. Gadot's citric acids and citric acid salts are marketed by Gadot in the United States, Europe, Israel, Asia and South America. In March 2007, an agreement was signed between Gadot and a Chinese partner for the establishment of a joint venture in China for the construction and operation of a plant for the manufacture of citric acid and citric acid salts. The joint venture will be conducted through a company incorporated in China, owned by Gadot (77.35%) and by the Chinese partner (22.65%). The cost and length of construction of the plant exceeded the initial estimates, and Gadot currently believes that the cost will amount to USD 65 million, and that the plant will be able to work at full capacity of 60,000 tons a year of citric acid in June 2010, after completion of the work required. Following notice to the Chinese partner, who also serves as the CEO of the joint company, a dispute arose between Gadot and the Chinese partner, who opposed his being let go. Gadot reached agreements with the Chinese partner regarding acquisition of his share, but these agreements are subject to the execution of a binding agreement and the performance of various conditions precedent. To date, uncertainty and various risks exist regarding the Chinese plant with respect to the dispute with the Chinese partner, financing of construction of the plant in China, debts to suppliers, cost of construction of the plant and the date on which it will begin operations. C. Nutritional supplements – The manufacture, marketing and sale of nutritional supplements and the processing of ingredients for the dietary supplements market. Gadot commenced operation in this segment in June 2007, with the acquisition of 85% of the US company

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Pharmline Inc. ("Pharmline"), in consideration of USD 11.3 million (total acquisition cost – USD 12.2 million). The dietary supplements market includes over-the-counter nutritional supplements sold in health food stores and pharmacies. Pharmline manufactures and processes ingredients used in the manufacture of dietary supplements and most of its sales are in North America. The products and services it sells include minerals, vitamins, carotenoids, natural herbal products, oils, nutritional supplements and processing services. Gadot's plant in Israel stands on land it owns in Haifa Bay, near the Kishon River. All of Gadot’s production facilities are at this location, including the fructose production facility and facilities for the production of citric acid, salts and other products. Gadot is currently constructing a raw sugar refining facility on its premises, in cooperation with Tate & Lyle Corp. The plant is intended to refine imported raw sugar which each of the parties in the venture will purchase for their needs, and should suffice for Gadot's entire sugar consumption and replace the white sugar (which is the principal raw material used at Gadot's plant) imported from the EU, the availability of which in Israel declined in 2007 due to the introduction of the new sugar regime. Pharmline's plant is in Orange County in New York State, and includes its head office, laboratories, production facilities, pharmacy, as well as the storage and dispatch zones required for its operations. Gadot has 270 employees in its plant in Israel and at Pharmline, as well as about 230 employees at the citric acid plant in China. In 2008 and 2009, Gadot's total revenues amounted to approximately USD 149 million and USD 139 million, respectively, and gross profit was approximately USD 23 million and USD 31 million, respectively. Net profit (loss) was USD (4.1) million and USD 6.6 million, respectively. As at December 31, 2009, Gadot had a working capital deficit of USD 26.3 million, and it is looking into several options for raising capital and/or debt. Delek Investments and ORL (which holds 23.15% of Gadot shares) informed Gadot that should it lack financial resources to meet its obligations, it would take action to help the company provide financing resources of an amount not to exceed USD 20 million (relative to the ratio of their holdings). 1.14.2 Desalination The Company's desalination operations are carried out through Delek Infrastructures, which holds 50% of IDE Technologies Ltd. ("IDE").1 Israel Chemicals Ltd. ("ICL") holds the remaining 50% of IDE shares. The agreement between the parties and IDE's articles of association describes, inter alia, the rights of both shareholders in IDE to appoint directors, the majority required for resolutions to pass in the board of directors and in the general meeting, the right of first refusal and a tag-along right. In addition, IDE has a management agreement with Delek Infrastructures and ICL, whereby management and consulting services are provided to IDE for the management fee. IDE is engaged in planning, set-up and sale of sea water desalination equipment and facilities, construction of turnkey desalination plants, operation of desalination facilities by the BOT (Build, Operate, Transfer) and BOO (Build, Operate, Own) methods. Desalination is the process of removing salts and other minerals from sea water, primarily make the water potable. IDE uses the two main desalination methods currently used worldwide for the desalination of sea water – thermal desalination and membrane desalination (primarily the reverse osmosis method). IDE's thermal desalination sector is based on well-established technologies. In the membrane desalination sector, IDE focuses on the large project market and especially on BOT and BOO projects. IDE is a known brand in the desalination industry worldwide and is considered one of the leading players. Furthermore, IDE's desalination operation includes significant low-volume activities in overlapping areas which include the design and supply industrial evaporators, industrial cooling systems, and ice- and snow-making machines. These activities were developed on the basis of IDE's know-how in the development of large industrial compressors. IDE executes several projects each year, and in its over 40 years of operation has set up over 380 plants in 40 countries, including Israel, India, China, Australia, Europe, North America, Latin America and the Caribbean. IDE has several major projects of significant financial size, as well as smaller projects and joint ventures. In addition, IDE also has ongoing agreements to provide operating services for the plants it established. IDE’s revenues can be divided into two sectors: revenues from construction contracts (construction of desalination facilities and other facilities) and revenues from the sale of water and operating and maintenance services. Revenues generated through BOT agreements in

1 About 0.2% of IDE shares are held by Mr. Asi Bartfeld, the Group's CEO and a director of IDE. For further information, see Section 1.18.3 C.

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the construction stage are included in the first sector, and revenues in the operational phase are included in the second sector. Below are details of IDE's major projects at the reporting date: A. Desalination plant in Ashkelon: VID Desalination Ltd. ("VID") was established to set up and operate the desalination project in Ashkelon. At the date of the report, the shareholders in VID are IDE (50%) and Veolia Water SA (50%). VID was awarded the tender issued by the State of Israel to install and operate a desalination plant in Ashkelon by the BOT method. Under the BOT agreement signed with the Ministry of Finance, and the addendum to it, the concession period is 25 years, ending June 2027. The plant was installed by OTID Desalination Partnership, of which IDE holds 50%, and the facility is operated and maintained by a company owned 40.5% by IDE. The cost of building the project was NIS 1.1 billion, financed by equity and shareholder loans (about 23.5%), with the balance coming from foreign capital. In August 2005, the plant started operations for a trial period, and in 2006 VID started commercial operation of the facility. The desalination plant, which operates on the membrane method (reverse osmosis), currently produces about 330,000 cu.m. of desalinated water per day (about 108 million cu.m. per year). The Ashkelon plant – one of the largest and most advanced of its kind in the world – started operation after receiving approvals from the Ministry of Health, the Water Commission the Desalination Authority and the Ministry of Environmental Protection. An agreement was recently signed with the State of Israel to expand the plant to approximately 118 million cu.m. per year. At the end of the concession period, this plant will be handed over to the State of Israel, free of charge. B. Desalination plant in Larnaca, Cyprus: An IDE consolidated partnership built a desalination plant in accordance with a contract for the sale of water to the Cyprus Water Authority. The cost of the project was NIS 181 million. Construction of the project ended in July 2001, when the partnership started operating the plant, which desalinates 54,000 cu.m. of water per day. Under said agreement, the company is required to run the plant for 10 years (through July 2011). In 2008, an agreement was executed with the Cyprus Water Authority to expand the facility by an additional 10,000 cu.m. per day. The expansion was completed in November 2008, and the facility is now producing 64,000 cu.m. per day. C. Desalination plant in Hadera: In September 2006, H2ID Ltd., held by IDE (50%) and by Shikun & Binui Holding Company Ltd. (50%), won a tender issued by the Government of Israel to plan, finance, construct, operate and maintain, by the BOT method, a desalination plant in Hadera with an annual output of 100 million cu.m. On November 23, 2006, an agreement was signed between the State of Israel and H2ID for a concession term of 25 years (of which 2.5 years of construction and 22.5 years of operation and maintenance). At the end of the concession period, the plant will be handed over to the State of Israel, free of charge. The project is currently under construction, and IDE estimates that it will be completed during the first quarter of 2010. The Government of Israel entered into an agreement with H2ID for the expansion of the facility by 27 million cu.m. per year. D. Desalination facilities in Jamnagar, India: In 1998, IDE completed the installation of four thermal desalination units at the oil refinery site in Jamnagar in India, with a total output of 48,000 cu.m. of desalinated water per day. In 2005, another unit was installed. At the end of 2007, an additional four units were installed, each with an output of 24,000 cu.m. of desalinated water per day, each. After installation of the final units, the total desalination output at the site is 160,000 cu.m. of desalinated water a day, and it is one of the largest plants of its type in the world. E. Desalination facilities in Tianjin, China: In June 2007, IDE signed a contract for the construction of four thermal desalination plants in Tianjin, with an output of about 25,000 cu.m. of desalinated water per unit per day. These are thermal desalination plants (multiple stage distillation) that provide potable water, distilled water, and salt water for the salt industry. After installation of the units, the total output of the site will be 100,000 cu.m. per day, and to the best of IDE's knowledge it will be the largest of its type in China. The estimated date for the completion of the project is 2010. F. In May 2008, IDE won a tender for supplying three desalination facilities with a total output of 72,000 cu.m. of desalinated water per day for a customer in Asia, at a total cost of approximately USD 80 million. The project is planned for completion at the beginning of 2010. (Following the global financial crisis, the customer asked to freeze construction of the third unit through the end of the first quarter of 2010.) In July 2008, IDE signed an agreement to build a desalination facility for an industrial customer in Australia, with a total output of 140,000 cu.m.

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of desalinated water per day, at a sale price of more than EUR 100 million. The project is planned for completion in 2010. G. Project pipeline: IDE is currently in various stages of bidding and negotiating for several large projects, including the following: (A) SDL (Sorek Desalination Ltd.), 51% held by IDE and 49% by a company in the Hutchison Group, won a tender by the State of Israel for the construction and operation of a seawater desalination facility in the Sorek region with an output of 150 million cu.m. of water annually, under a BOT agreement, for a period of about 26.5 years after execution in January 2010. SDL is currently negotiating with financial institutions for financing arrangements; (B) IDE was awarded a tender and entered into an agreement with the Electric Authority of Cyprus for the provision of a seawater desalination facility with output of 60,000 cu.m. a day; (C) IDE is in advanced negotiations on a desalination project in California with a capacity of 190,000 cu.m. of water per day; (D) IDE, along with its partners, was recently awarded a project in India for provision of a seawater desalination facility of 100,000 cu.m. a day. H. In 2008 and 2009, IDE's total revenues were approximately NIS 970 million and NIS 1,484 million, respectively, according to the following breakdown – revenues of NIS 795 million and NIS 1,272 million from construction contracts, respectively, and revenues from the sales of water and operation and maintenance services reached NIS 175 million and NIS 212 million, respectively. In 2008 and 2009, IDE’s gross profit was NIS 195 million and NIS 376 million, respectively. Net profit for IDE in 2008 and 2009 was NIS 38 million and NIS 279 million, respectively. I. The guarantees the company provided IDE regarding the financing agreements for IDE’s various projects amounted to NIS 104 million on December 31, 2009. 1.14.3 Power plants for generating electricity Delek Infrastructures Ltd., wholly owned by Delek Investments builds and operates power plants in Israel and abroad. As part of its activity, Delek Infrastructures, through subsidiaries, built and currently operates two power plants in Israel and in Brazil, and is working to build four additional power plants in Israel, currently in the development phases, as outlined below. I.P.P. Delek Ashkelon Ltd. ("Delek Ashkelon"), a wholly owned company (concatenated) of Delek Investments, was awarded the tender to build the power plant on the premises of the desalination facility in Ashkelon, to generate 87 megawatts of electricity. Most of the power plant's output is to be used by the desalination plant of VID in Ashkelon, with the rest being sold to private customers and/or Israel Electric Corp. (IEC). The period for supply of power to the desalination plant was set as 22.5 years. This period ends in June 2027. On February 2008, the Electricity Authority approved the issue of a temporary license for the generation and supply of electricity to the power plant, and on February 16, 2009, the Minister of Infrastructure approved the issue of permanent licenses for the generation and supply of electricity by the plant. On April 13, 2008, Delek Ashkelon entered into an agreement for the provision of up to 22.5MW of electricity to Nilit Ltd. (“Nilit”) and with an estimated worth of approximately NIS 50 million a year, as of December 31, 2009. The agreement is for a period through December 31, 2011, with an option to extend for another six years. The provision of electricity to Nilit began in April 2008. Delek Ashkelon’s total revenues in 2007, 2008 and 2009 were NIS 78 million, NIS 170 million and NIS 185 million, respectively. In addition to the foregoing, Delek Infrastructures came in as controlling shareholder (51%) of the Brazilian company, Enegen Participaceos S.A. ("Enegen”) (formerly “Genrent Participation Ltd.”). Enegen holds 70% of the rights in a project for the construction of a 140 MW power plant, at an estimated cost of USD 50 million, in Goiânia, Brazil ("Project"). Delek Infrastructures' share in the Project is 35%. The construction of the power plant was completed in January 2009. In January 2008, Delek Infrastructures established IPP Delek Ramat Gabriel Ltd. ("Delek Ramat Gabriel"), in which it owns 57% of the share capital and voting rights. The other shareholders are Sigma Epsilon Power Engineering Ltd. (28%) and Adi Energy Ltd. (15%). On January 10, 2008, Delek Ramat Gabriel signed a Memorandum of Understanding with Nilit, a company that manufactures nylon yarns, the focus of which related to the agreements reached regarding the construction of a private power plant on Nilit's premises in the Ramat Gabriel industrial zone in Migdal Haemek. The cogeneration power plant (producing electricity and steam) will have a capacity of 55 MW. The plant will provide all of Nilit's electricity and steam requirements, and the

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surplus electricity will be sold to private consumers. The estimated cost of setting up the power plant is USD 46 million. Construction of the power plant depends on a financing agreement for the project from a bank. On November 13, 2008, an agreement was signed between a subsidiary of Delek Infrastructures and Nilit. The term of the agreement is 27 years, commencing when financing for construction of the plant is closed. On October 28, 2008, Delek Infrastructures and its partners for building the power plant at Nilit, through IPP Delek Alon Tavor Ltd. (“Delek Alon Tavor”), in which Delek Infrastructures holds 57% of share capital and voting rights, signed a Memorandum of Understanding with Tnuva Central Cooperative for the Marketing of Agricultural Produce in Israel, Ltd. ("Tnuva”), concerning the construction of a cogeneration plant (for electricity and steam) operating on natural gas, on the grounds of the Tnuva factory in Alon Tavor, with an output of 55 MW and a cost of USD 60 million. In July 2009, an agreement was signed with Tnuva for the planning, financing, licensing, construction, operation and maintenance of the power plant. The term of the agreement is 27 years, commencing on the date on which financing is closed for the construction of the power plant. During the term of the agreement, the land on which the power plant will be built will be leased through sublease to Delek Alon Tavor. The agreement is conditioned upon financial closing being completed by April 30, 2011, and the construction of the power plant by October 31, 2012, subject to the terms stipulated in the agreement regarding the deferral of the dates, as aforementioned. The plant will provide electricity and steam to the Tnuva factory and will be entitled to provide surplus energy and steam to other factories in the Alon Tavor Industrial Zone. IDE and Hutchison entered into an agreement with Delek Infrastructures, prior to the submission of their proposal on the Sorek tender, according to which Delek Infrastructures Ltd. will provide, through a project company it will open, all of the desalination plant’s electricity needs. The provisions of the tender allow Delek Infrastructures to construct a power plant, on the area designated for the desalination plant, subject to receipt of the statutory approvals. Delek Infrastructure plans on exercising this right and constructing a power plant that will serve the desalination facility and additional customers. On January 6, 2010, Delek Infrastructures entered into an agreement with private developers, under which it would be allocated holdings of no less than 84% (after allocation) in a company promoting a project to construct a power plant for the generation of electricity using natural gas, with an output of 240 MW, in the Kiryat Gat Industrial Zone and that has an option to purchase the land on which the power plant is supposed to be built. The remaining holdings (up to 16%) will remain with the developers. Additionally, the developers were granted the option of increasing their holding by 10% from the project company (to up to 26% in total), subject to that stipulated in the agreement. The estimated cost of the project is USD 280 million. It should be noted that the Kiryat Gat Industrial Zone has large consumers of electricity and steam, to whom the project company plans on directing most of the Kiryat Gat power plant’s production capacity. The completion of the engagement between the parties is conditioned on the performance of the conditions precedent, including the completion of due diligence to the satisfaction of Delek Infrastructures, approval of the Board of Directors of Delek Infrastructures and approval of the Anti- Trust Commissioner (if required). Note that the above estimates may not materialize or may change. It is not certain that the transaction will be completed under the foregoing conditions or different terms, and it is not certain that the power plant, subject of the transaction, will be built. It is noted that the infrastructure involves large investment in the construction and running-in periods, which extend two to four years, and income from them is expected only after the construction period. 1.14.4 HOT On November 12, 2009, Delek Investments signed an agreement with Cool Holdings Ltd. for the sale of part of its holdings in HOT Communications Systems Ltd. (“Shares”), 9,127,271 shares of HOT, constituting 12% of HOT’s share capital (“Shares”), at a price of NIS 44 a share (“Agreement”) and a total price of NIS 402 million. The Shares were sold as is on the date of execution of the Agreement. On December 9, 2009, after receipt of all the approvals, the sale of the Shares was completed. After completion of the transaction, the subsidiary’s direct holdings of the Shares in HOT dropped below 5%, and Delek Investments no longer has directors at HOT. The capital gains recorded by Delek Investments following the sale, as included in the results of the fourth quarter of 2009 are NIS 195 million (prior to tax impact). The balance of the investment in HOT is stated in Delek Investment’s financial statements as an available for sale financial asset, which is approximately NIS 119 million at December 31, 2009.

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1.14.5 Noble In August 2009, the Company’s Board of Directors resolved to approve an investment of up to USD 218 million to purchase shares of the US company, Noble Energy Inc. (“Noble”), traded on the New York Stock Exchange (NYSE), and the Company also entered into an agreement with a foreign bank for receipt of a credit facility of USD 120 million for the purchase of the shares. The purchase of the shares is intended as a financial investment. For additional information, see the Company’s immediate report dated August 19, 2009 (reference no.: 2009-01-202077), mentioned here as a reference. During the five-month period ended on December 31, 2009, the Company purchased Noble shares and sold them for a total profit of NIS 46 million (before tax effect). As of December 31, 2009, the balance of the investment in Nobel shares amounted to NIS 440 million. Shortly after the date on which the report was signed, the balance of the investment in Noble shares amounted to NIS 280 million. The Company plans to continue to conduct sales and/or purchase transactions of Nobel shares. Financing of the investment is planned through independent sources of the company and the banks. The company entered into an agreement with a foreign bank, under which the company was provided with a non-recourse credit facility of USD 120 million. Use of the credit based on said facility involves the provision of security by the company as outlined below and is restricted for the first year from the date of provision of the facility. The credit to be used will be due for repayment in May 2012. The interest in respect of the credit to be used in the credit facility is annual interest at the Libor rate + 3.43% (and plus tax withholding at the source, should this be applicable). As security for the credit, the company placed a charge in favor of the bank on Nobel shares, with an agreement that should there be a deviation of a certain percentage between the value of the security and the value of the debt balance (which is subject to changes under certain circumstances), the company will be required to provide a cash deposit as an additional security, in an amount that will result in compliance with agreed ratio of security to the debt. The bank is entitled, as long as there is a charge on the shares in its favor, to borrow, charge or make additional dispensations with the charged shares. The company will be entitled to take the dividends, should they be distributed, in respect of the charged shares, subject to its compliance with the ratio of security to debt, as required. Furthermore, the credit includes provisions regarding events for immediate forced repayment, including cases of change in control, radical change in the volumes of Nobel trade, trade stoppages or sharp declines in the prices of Nobel’s shares. Below is an update to the information provided in said immediate report on Nobel (the information set out below is based on Nobel’s reports in the United States): Nobel is an energy company registered for trade on the New York Stock Exchange (NYSE) and engaged in the purchase, exploration, development, production and marketing of crude oil, natural gas and natural gas liquids worldwide. Noble has activity both in the United States and globally. In the US, most of the activity is in the Rocky Mountains, mid-continent and in the Gulf of Mexico. Outside the US, Nobel is primarily active off the coast of Israel, in the North Sea and West Africa. In 2009, activity in the US constituted 56% of Nobel’s total revenues. As at December 31, 2009, 56% of the Nobel’s proven reserves were in the US (approximately 55% of them are natural gas and 45% crude oil and natural gas liquids). Accordingly, in 2009, activity outside the US brought in 44% of Nobel’s total revenues, and as at December 31, 2009, 44% of Nobel’s total proven reserves were outside the US (64% of which are natural gas and 36% crude oil). Nobel’s total assets as at December 31st of 2008 and 2009 were USD 12,384 million and USD 11,804 million, respectively. Nobel’s total liabilities as at December 31, 2008 and 2009 was USD 6,075 million and USD 5,650 million, respectively. The operating profit (loss) of Nobel in 2008 and 2009 was 1,645 and (58), respectively. Nobel’s net profit (loss) in 2008 and 2009 was 1,345 and (131), respectively. Nobel’s financial statements are prepared according to US GAAP, and the financial data is stated in USD. To view Nobel’s 2009 financial statements (10-K), see http://www.sec.gov/Archives/edgar/data/72207/000007220710000006/form10-k.htm. For additional information about Nobel and to read its reports to the US SEC, see Nobel’s website: http://www.nobleenergyinc.com. 1.14.6 RoadChef On March 30, 2007, a foreign company held by Delek Israel (25%) and Delek-Belron International Ltd. (a subsidiary of Delek Real Estate, a company owned by the controlling shareholder of the Company) (“Delek Belron”) (75%) purchased all the share capital of a foreign company that itself

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and through its subsidiaries held a chain of motorway service areas (“MSA”) in the UK. (The service areas are located at 20 sites operating as service areas). The foreign company operates under the name RoadChef (“RoadChef”). In consideration for the acquisition of the MSA, the sellers were paid a total of GBP 158 million, with GBP 145 million paid by way of repayment of shareholder loans and the remainder as bonuses to existing management. It should be noted that the acquisition of the foreign company including assuming the existing debt in the purchased foreign company, in the amount of GBP 217 million. In July 2007, Delek Israel transferred the shares of said company to the company for the cost of its investment in it. To finance the purchase, a loan was taken from Merrill Lynch in the amount of GBP 150 million (GBP 145 million after deduction of financing expenses and the cost of securing credit) for a period of 18 months at an interest rate of Libor + 1.76%. Said loan was repaid in September 2008 through a shareholder loan provided by the company and Delek Real Estate. The company’s share in the shareholder loan is GBP 37.8 million (approximately NIS 240 million). In September 2008, the Delek Group provided Delek Real Estate with loans amounting to NIS 280 million (“RoadChef Loans”) as part of preparations for refinancing of the RoadChef transaction. In July 2009, the extension of said loans through December 31, 2010 was approved. For information regarding RoadChef Loans, see section 1.14.7 and details under Regulation 22 in the fourth part of the periodic report. As at the report date, RoadChef operates 27 motorway service areas around Britain, at 19 different locations (nine of which are service areas on both sides of the motorway). RoadChef’s operations as part of the motorway service areas includes the operation of 25 gas stations, 15 hotels (including 600 rooms), restaurants, stores and coffee stands operated both by RoadChef and concessionaires, convenience stores and entertainment areas – and all on a total area of 76,000 sq. m., built on approximately 240 hectares. Two of the gas stations are operated by a third party, with RoadChef having engagements through different types of operating contracts for the other stations. Some of the real estate assets on which the service areas are operated are wholly owned (7 assets), under long-term lease exceeding 70 years (4 assets) and the rest are leased for the medium-term (less than 70 years). All of the assets are in Britain, with the exception of three in Scotland. RoadChef’s market share according to the reports of its management is 23% of the MSA market in Britain, including about 101 MSAs owned/operated by three main operators. RoadChef is one of these three operators. Numerous legislative restrictions apply to the operation of MSAs, primarily restrictions related to proceedings required to establish MSAs (the main restriction is that there must be 30 miles between MSAs) and restrictions on how they are operated. Said restrictions create a situation where the odds of third significant player joining the market are low. The aforementioned revenues of the MSA are for the most part based on five main types of activity: fuel sales; retail; catering services (under brands belonging to RoadChef, under an exclusive licensing agreement with Costa Coffee and Wimpy, a chain that provides fast food, Pizza Hut Express and O’Briens, which sells sandwiches throughout Britain); hotel management and accommodation services under the Premier Travel Inn brand, and entertainment. Additional revenues come from overnight parking of trucks, ATMs, photocopiers, passport photos and public phones. RoadChef employs close to 2,400 employees, most at the MSAs it operates. Management agreement - In January 2008, a management agreement dated June 29, 2007 (as revised on May 15, 2008 and March 5, 2009, in effect since January 2008) entered into effect between a foreign subsidiary of the company that holds RoadChef – MSA Acquisitions Co. Ltd. (“MSA”) and a third party, Country Estate Management (Services) Ltd. (“Management Company”) for the management of RoadChef’s assets.1

1 To the best of the company’s knowledge, the management company is an SPV, founded with respect to the engagement through the management agreement. To the best of the company’s knowledge, it is owned by a third party that has the knowledge and experience in the area of operations and management of real estate assets and operational assets in England.

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Under the Management Agreement, the Management Company warranted to perform on behalf of the MSA Board of Directors the roles and activities for realizing control of operations and decision- making on behalf of MSA at RoadChef and its subsidiaries, and for reporting to MSA and the controlling shareholders regarding said decisions and their implications. As part of the agreement, the Management Company undertook to maintain a minimum annual EBITDA for RoadChef and its subsidiaries in an amount the changes each year (with the annual average for the five years being GBP 30 million). In accordance with the addendum dated March 5, 2009, it was set that payment of the negative difference, to the extent such exists, between actual EBITDA in the management years and annual EBITDA to which it undertook in respect of said years, will be effected at the end of the Management Agreement term (instead of a mechanism for calculation during each year included in the original agreement). It was further determined in the agreement that should actual EBITDA in a specific year exceed that to which the Management Company undertook in respect of said year, the Management Company will be entitled to receive the difference (subject to offsetting pursuant to the provisions of the agreement (“Outperformance Fees”). The Management Company will be entitled to withdraw the Outperformance Fees only at the end of the Management Agreement term, and this after offsetting payments due by the Management Company pursuant to the provisions of the Management Agreement.1 In consideration for its services, the Management Company is entitled to GBP 400,000 a year (representing reimbursement of the amount expected of the Management Company’s expenses and costs), Outperformance Fees, as set out above (upon conclusion of the Agreement, should there be any such entitlement) and 7.5% of an increase in value (should there be any) as of the date of termination of the Agreement or its termination by the company (and not due to breach by the Management Company) or sale of control in RoadChef compared to the value as it was on the date of acquisition (in the calculation outlined in the Agreement). The Management Agreement is in effect through January 4, 2013. MSA is entitled to terminate the agreement, inter alia, should the services not be provided by the manager of the Management Company (and its owners) and should negotiations for the sale of the holding be underway or should MSA believe that termination of the engagement through sale of the holding is an advantage. To the best of the company’s knowledge, as of the date of the report the continued engagement through the agreement is being reviewed, and this, inter alia, in light of the desire to improve the holding in the best way possible. To the best of the company’s knowledge, Delek Real Estate believes that termination of the Agreement prior to the date on which it ends may negatively impact on the ability and desire of the Management Company to pay its debt balance to MSA, as accrued under the agreement with it and the accounting for which, under the terms of the Agreement, is supposed to be done at the end of the Agreement term. In the third and fourth quarters of 2009, MSA set aside provisions in respect of the Management Company’s debt. Financing at RoadChef A. In December 1998, RoadChef completed a securitization process, in which a subsidiary established specifically for this purpose (SPV) on the Luxembourg Stock Exchange raised GBP 210 million. The debt was guaranteed by a charge that included, inter alia 16 of the MSAs operated by RoadChef. B. The debentures issued under the securitization process were as follows: 1) debentures amounting to GBP 35 million, bearing variable interest, which were paid in 2008; 2) debentures amounting to GBP 133 million, bearing 7.418% interest for repayment in equal installments beginning in 2009 and through 2023; 3) debentures amounting to GBP 42 million, bearing 8.015% interest for repayment in equal installments, beginning in 2024 and through 2026. The balance of the debt in respect of said debentures as of the date of acquisition was GBP 187 million. C. The terms of the debentures stipulated several financial covenants with which RoadChef’s subsidiaries must comply. They relate to the ratio of profit before earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA) to the amount of the annual payment to the debenture holders, plus interest expenses to be no lower than 1.25. Failure to comply with this ration, will require RoadChef (the parent company – Roadchef Limited) to put up additional equity in favor of its subsidiaries. In 2007, RoadChef put up GBP 1.5 million for this purpose.

1 The payment is conditioned upon the Management Company’s compliance with its obligations in accordance with what is standard in FRI – Full Repair and Insurance lease agreements.

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In 2008 a total of GBP 6.5 million, and in 2009, GBP 5 million. To date, the subsidiaries comply with said financial covenants. D. Additionally, as part of the debenture terms, RoadChef’s subsidiaries received at that time an additional credit facility from Barclay’s Bank, linked to the Retail Price Index and as of December 31, 2008 is GBP 11.2 million. E. Three assets defined as a development group of RoadChef have charges to Barclay’s, which in exchange is providing a loan, the balance of which, as of the balance sheet date, is GBP 4.6 million and a credit facility of GBP 10.5 million. Steps to sell RoadChef In November 2008, the company and Delek Real Estate decided to act jointly to sell their investment in RoadChef. In July 2009, loans provided by the Delek Group and Delek Real Estate were extended and as part of this Delek Real Estate undertook to the Delek Group to join Delek Petroleum and sell its share in RoadChef should Delek Petroleum decide to sell its share in RoadChef, and provided that the terms of sale are identical, noting the relative share of the company in RoadChef. Therefore, as of that date, the investment is stated under assets designated for sale. Through that date, the investment in RoadChef was recorded using the equity method. For additional information, see Note 2Q to the financial statements. In 2009 and through February 2010, there was a sales process in which potential buyers conducted tests and bids were received for the purchase of the investment. In 2009, based among other things, on the bids received as part of the process to sell the investment and the amortization for the impairment of the value of assets included in RoadChef financial statements, and in light of the changes in the shekel value of the investment, the company amortized its investment in RoadChef by NIS 32 million, which was included in the section on impairment in respect of investments in investees. The balance of the investment as of December 31, 2009, stated under assets designated for sale, amounts to NIS 183 million (corresponding to the company’s share in the equity of RoadChef after said impairment and plus the balance of the company’s loans to RoadChef). For additional information regarding the lack of progress in the negotiations with a potential buyer and the change in the accounting treatment as of the first quarter of 2010, see Note 2Q to the financial statements. Given the delays in the process to sell RoadChef, due inter alia to the economic slowdown in Britain and the impairment of the value of RoadChef assets, as of the date on which the report was signed, the management of the Delek Group is willing, should Delek Real Estate request, to recommend to the authorized bodies of the Delek Group to extend the date for repayment of the loan the Delek Group gave to Delek Real Estate. Any such extension is will be subject to the legally required approvals.

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1.14.7 Delek Real Estate As of the date of this report, the company holds 5% of Delek Real Estate shares, and the real estate sector is no longer an operational segment for the company. The main interest of the company in Delek Real Estate is attributable to loans and guarantees given when Delek Real Estate was a subsidiary of the company. For information regarding the loans and guarantees, see the listing according to Standard 22 in the fourth part of the periodic report. Below is a list of loans and guarantees made by the company and its subsidiaries to Delek Real Estate as at this date (the data for December 31, 2009, the securities section presents the book value of the assets used as securities in Delek Real Estate’s financial statements of December 31, 2009): Section in Details Provided under Standard 22 in the Fourth Part of the Company Loan / Guarantee Periodic Report Main Conditions Securities Delek Group NCP loan, balance of 4 A Interest 9.5%/10.7%, according to the terms of the NIS 50 million. loan, as a result of a charge placed on Beit Adar that is subject to the approval of the bank. The principle is to be repaid on December 31, 2010. Delek Group RoadChef loans, 4 B Interest 9.5%/10.7%, according to the terms of the 24% of the shares of the subsidiary that holds balance of NIS 320 loan, as a result of a charge place on Beit Adar that is RoadChef (including the loan principle of NIS 200 million. subject to the approval of the bank. The principle is to million) – book value of the shares in Delek Real be repaid on December 31, 2010. Estate’s books is NIS 167 million. Upon repayment of NIS 150 million, the company is After purchase of the debt from the bank, there will be committed to purchase about NIS 150 million Delek a second priority charge on the Hof Hacarmel project Real Estate’s debt to a bank at the par value of said (the first priority charge guarantees a debt of NIS 348 debt. million). The book value of the project in Delek Real Estate’s books is NIS 322 million. Phoenix The 2004 loan, 4 C Loan A – 8.75% interest; 100% of shares in Dankner Investments. balance of NIS 164 Loan B – 8.6% interest. Book value of the shares in Delek Real Estate’s books million, of which The principle and the interest for repayment by 2012. – NIS 77 million. about NIS 77 million In respect of the 2004 loans and 2008 loans, the of profit-sharing following securities were provided: policies. 48% of Vitania shares, to be released after payment of NIS 170 million. The book value of the shares in Delek Real Estate’s books – NIS 197 million. It should be noted that said shares were valuated for their value as a security for a decision as to changing the terms of the loans in September 2009 by NIS 160 million. Delek Real Estate’s rights to a plot in Kfar Silver. The book value of the plots in Delek Real Estate’s books is not material.

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Section in Details Provided under Standard 22 in the Fourth Part of the Company Loan / Guarantee Periodic Report Main Conditions Securities Phoenix 2008 loan, balance of 4 C 9.4% interest. 30% of Delek Real Estate shares are leased assets. NIS 65 million, of The principle and interest for repayment by 2012. Book value of the shares in Delek Real Estate’s books which NIS 44 million – NIS 46 million. of profit-sharing Shareholder loan provided by Delek Real Estate. policies. Book value of the shareholder loan in Delek Real Estate’s books – NIS 360 million. 100% of Dankner Investment shares. Book value of the shares in Delek Real Estate’s books – NIS 77 million. See above regarding the joint securities for the 2004 and 2008 loans. A mechanism for cross-securities was set up between the loans. Delek Group Guarantees for the 4 D In respect of the guarantees, an annual fee of 1.5% is -- liabilities of Delek paid. Real Estate and its subsidiaries to banks, amounting to NIS 59 million. Phoenix Holdings in Delek Interest ranges between 4.8% and 6.3%, repayment -- Real Estate dates of the principle of the various series are through debentures: 2019. Provident funds, pension funds and profit-sharing policies – NIS 92 million. Proprietary account – NIS 3.6 million. Excellence Holdings in Delek 4.8% interest, repayment dates of principle through -- Real Estate 2019. debentures: Trust funds and ILCs – NIS 35 million.

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It should be noted that there are also various engagements between Delek Real Estate and the company and its subsidiaries, as set out according to Standard 22 in the fourth part of the periodic report. Delek Real Estate’s operations are negatively impacted by the global financial crisis and the global real estate crisis. These may lead to tougher terms for receipt of financing to repay Delek Real Estate’s obligations, a decline in demand for yielding properties, decline in the occupancy rates and rent, which have a negative impact on Delek Real Estate, its equity, fair value of its assets, and ability to comply with financial covenants agreed upon with the various credit providers. These and other risk factors faced by Delek Real Estate, should they materialize, may make it difficult for it to pay its debts to the company, lead to guarantees given by the company and the subsidiaries to be called in and to negatively impact on the company’s financial standing. As set out in part four of the periodic report, in July 2009, a payment to the Delek Group was not paid on time under the terms of the NCP loan, and in August 2009, payments to the Phoenix in accordance with the terms of the 2004 and 2008 loans were not made on time. The terms of said loans were changed by agreement in July and October 2009, respectively. As of December 31, 2009, Delek Real Estate had a serious deficit in its consolidated working capital (NIS 2,470 million). Delek Real Estate’s ability to meet its obligations is a risk factor for the company. Delek Real Estate expects to resolve the equity issue by selling assets and extending the term for repayment of short-term credits. Along with the sources, Delek Real Estate’s ability to obtain sources for repayment of its obligations is primarily based in assumptions regarding the sale of assets according to their value in Delek Real Estate’s books, receipt of dividends from investees, moving up revenues from a material tenant and receipt of loans and credit facilities from banks. Receipt of financial sources as the result of the sale of assets is dependant on Delek Real Estate’s relevant risk factors not materializing. Inter alia, dividends may not be received by investees in the following cases: failure to receive the approvals required by the subsidiaries, and failure to comply with the legal requirements for distribution of dividends at the subsidiaries. The moving forward of revenues from a material tenant and receipt of loans and credit facilities from banks is dependant on the Delek Real Estate’s relevant risk factors not materializing. Among other things, different negotiations may not lead to contractual engagements or fail to yield the projected cash flow in the following cases: failure to attain agreements with parties to negotiations for any reason whatsoever, and deterioration in Delek Real Estate’s financial standing. In addition to the uses, Delek Real Estate’s liabilities are based, inter alia, on the assumption that short-term on-call credit extended to it in the amount of NIS 548 million will not be called in for repayment. At this time, the securities are sufficient for the banks that provided it. Delek Real Estate may be ordered to pay additional amounts, in a material amount, should its relevant risk factors materialize. Among other things, Delek Real Estate may be ordered to pay additional amounts in the following cases: failure to comply with financial covenants and/or downgrading of the rating may lead to loans and/or Delek Real Estate’s debentures to be called in for immediate payment; the calling in of Delek Real Estate’s debentures for immediate payment may lead to immediate repayment of other loans extended to it; the calling in of on-call credit for payment as set out above; non-extension of the loans given to Delek Real Estate by the company, and the creation of additional Delek Real Estate liabilities. The company’s management engages in ongoing review of Delek Real Estate’s ability to pay its aforementioned debts, and this based on public information and discussions with the management of Delek Real Estate. To the extent the company believes there is a material and negative change in Delek Real Estate’s solvency, it will be reported as required. 1.14.8 Barak Capital The company holds (though Delek Capital) 47.85% of the shares of Barak Capital Ltd. (“Barak Capital”), the controlling shareholder of which is Mr. Eyal Bakshi, who holds 48% of the shares. Barak Capital is a private company primarily engaged in trading securities, derivatives and financial instruments in Israel and abroad for itself. Its trading activity is based on arbitrage, which combines base assets, options and futures contracts based on day trading, including the execution of large- scale transactions, based on day trading at low margins, use of long/short strategies and unique sophisticated trading strategies, leveraging mispricing in the market, balancing positions by the end of the trading day (delta neutral) and leveraging mispricing in the trade of bonds (between different bonds and underpricing of linked shares. The trade activity is conducted through dozens of agents, who work on the Barak Capital Group’s accounts, with each agent acting independently, under supervision and subject to Barak Capital’s policies.

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Barak Capital also holds 49.975% of Index Teudut Sal, jointly controlled with third parties, and which is one of the leading companies in the area of ILCs, managing over NIS 5.5 billion in funds as part of the 52 ILCs traded. Barak Capital is held by the company as a financial holding, and Delek Capital is not involved in the ongoing management of its business. Barak Capital’s activity involves various risks attributable to the complexity of its operations, large scale of transactions and significant regulation in the financial sector. Among other things, Barak Capital’s operations involve risks such as market failures and lack of liquidity, operational risks including malfunctions of the IT systems, trade mistakes, and exposure to counterparty risk. Additionally, Barak Capital engages in underwriting and distribution through a subsidiary, Barak Capital Underwriting Ltd. 1.14.9 Additional holdings and investments: Delek Group has additional investments and holdings that are not part of the Group’s segment of operation. These include, inter alia, holdings in high-tech companies and financial investments.

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Part Four – Matters Relating to Operations of the Company as a Whole

1.15 Property, plant and equipment

The corporate headquarters are located in an office building on Giborey Israel Street in Netanya, with a total area of some 3,360 sq.m. plus parking spaces. The building is partly owned by Delek Real Estate (a company which is controlled by the controlling shareholder in the Company). The office space is leased to the Company and its subsidiaries and additional companies owned by the controlling shareholder, where each company participates in the rent pro rata to the area it uses. The engagement is part of the normal course of business on market conditions and the rent is not material.

1.16 Human resources

1.16.1 Organizational structure The Company is a holdings company which controls, directly and indirectly, numerous companies that conduct their operations independently. The Company has made its investments in recent years subsidiaries held directly by the Group, Delek Investments (100%), Delek Petroleum (100%) which also hold subsidiaries, among them Delek Capital (94%), Delek Infrastructures (100%) and Delek Europe Holdings (80%) which together constitute the headquarters companies. The financing of the investments or the guarantees for the financing are often provided by the Company or by Delek Investments or by Delek Petroleum. The procedure is that material transactions made by these subsidiaries require not only approval within the companies but are also submitted for approval by the Company's board of directors. Delek Petroleum is a public company whose debentures were offered to the public in 2008 and 100% of its shares are held by the Company. Delek Capital is a private company incorporated in 2006 to control the Group’s financial operations, and 94% of its shares are held by Delek Investments. 1 Delek Europe Holdings is a private company 80% of which is held by Delek Petroleum and 20% by Delek Israel. The description in the sections covering Company operations as a whole refers to the Company, and the other headquarters companies as a single entity. 1.16.2 Employee headcount The Company and its headquarters companies employ a staff of about 28, of whom eight are officers and senior management, and the remainder are head office and administration employees. These employees also serve as managers and employees of the headquarters companies. 1.16.3 Officers and senior management employees in the Group Group officers and senior managers are employed under personal contracts which include various forms of pension coverage. Some officers and senior managers are entitled to acclimatization bonuses for periods of up to six months. Some of the Group's company managers and directors (including the Company’s CEO and Chairman, who serve as directors of Group companies) have been granted, for their roles in said companies, shares or stock options which usually constitute up to 2% of the issued, paid-up share capital of those companies. The terms for exercising the options include an extended period for their exercise as well as additional terms. In some cases, loans have been provided to officers in the Group (including the CEO and the Chairman) for purchasing securities of Group companies. In addition, the Group usually awards bonuses to managers in amounts which are based on parameters such as managerial rank, the business results of the Group and personal achievements of the manager in the Group. Officers are also eligible for insurance, waiver and indemnification in respect of activities performed in their official capacity. In addition, most of the Group’s officers and senior managers received phantom options in June 2009. For further details regarding adoption of the phantom option plan for employees and senior managers, under which, inter alia, phantom options were granted to the Company's CEO and other officers, see Chapter D of the Periodic Report. For details of the remuneration of senior Group officers (including the Group’s Chairman and CEO) pursuant to Article 21 of the Immediate Periodic Report Regulations, see Chapter D of the Periodic Report.

1 5% of Delek Capital shares are held by its CEO, Danny Gutman and 1% of its shares are held by Asaf Bartfeld, CEO of the Company.

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1.17 Finance

This section does not refer to the credit received by the subsidiaries operating in the segments of operation, unless explicitly stated otherwise. 1.17.1 Below is the average interest rate for loans from bank and non-bank sources, in effect in the period of the Periodic Report and which are not designated for special use: Short-term loans Long-term loans effective Avrage effective Avrage interest intrest rate interest intrest rate rate rate Unlinked NIS ------2.8% 2.8% loan Linked NIS 5.33% 5.2% 4.08% 4.0% Bank sources credit $-linked credit 3.46% 3.4% 2.84% 2.8% Euro-linked 3.56% 3.5% 3.05% 3.5% credit Unlinked NIS 8.53% 8.2% ------Non-bank loan sources Linked NIS 5.12% --- loan

1.17.2 Credit received between the date of the financial statements and their publication Have not recived.

1.17.3 Credit facilities Credit facilities prior to the date of publication of the financial statements amounted to approximately NIS 500 million of which approximately NIS 350 million is not guaranteed and is subject to change and might change from time to time primarily as a result of single-borrower limits. 1.17.4 Variable interest credit Details of the variable interest credit received by the Company in 2009: Interest rate prior to publication of Change mechanism Interest range in 2009 the Periodic Report Bank of Israel interest + 2.3%-3.3% 3.7% LIBOR $ + 2.7%-4.5% 3.1% LIBOR euro + 2.8%-4.5% 3.4%

1.17.5 Credit rating All the debenture series issued by the Company are rated A1 by Midrug. In August, September and October Midrug announced a rating of A1 Stable for the debentures issued by the Company in said months (Series N, O, P, Q and R). Debenture series A, E-M, V and W are rated by S&P Maalot. On May 26, 2009 S&P Maalot announced that it was lowering the ratings of these series from AA to A, with a ratings outlook of Stable. Furthermore, the Company was taken off its negative credit watch to which it was added on September 20, 2008. For further details see the Company's Immediate Report from May 26, 2009 (ref. no. 2009-01-1220888). 1.17.6 Material agreements with banking corporations in the reporting period In order to distribute the shares of Delek Real Estate as described in section 1.12.4B above, negotiations were conducted with the banking corporation to which the Company's shares in Delek Real Estate were encumbered. As a condition for release of the encumbrance on Delek Real Estate’s shares and consent to a change in the control of Delek Real Estate, the Company entered into the following agreements with the banking corporation on March 26, 2009:

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A. The banking corporation cancelled the existing encumbrance in its favor on the Delek Real Estate shares owned by the Company and approved the distribution of the shares. B. The banking corporation made a new loan immediately available to the Company in the amount of NIS 150 million. This will be a short-term loan until the date when the Company purchases part of the debt owed by Delek Real Estate to the banking corporation, and after this date the loan will become a long-term loan repayable in one payment in 2018 at the interest rate of prime minus 0.25%. C. The Company has given an undertaking to the banking corporation that whenever Delek Real Estate makes a repayment to the Company on account of the loans granted by the Company to Delek Real Estate for RoadChef (principal of NIS 280 million), the Company will use the proceeds of any repayment to purchase from the banking corporation part of the rights to the debt which Delek Real Estate owes to the banking corporation, in the amount of said repayment, up to the cumulative amount of NIS 150 million. This debt is for a loan to purchase the Hof Hacarmel project. Pursuant to the terms of the debt, interest at the rate of prime minus 0.25% will be repaid in quarterly installments and the principal will be repaid in one payment on January 30, 2018. D. The sale by the banking corporation of the debt to the Company will take place without an assignment of any of the rights of the banking corporation in the collateral given and/or which will be given in its favor to guarantee the debt. The Company will be authorized to record an inferior lien on assets guaranteeing the debt subject to a number of conditions. E. To guarantee the Company's undertakings to the banking corporation, the Company will assign to the banking corporation, in the form of a senior lien, all its rights pursuant to the loan agreements of Delek Real Estate for RoadChef. For details of the RoadChef and Hof Hacarmel loans, see sections 1.32.18C and ____ above. Following an early repayment of some of the loans to the above-mentioned banking corporation, on December 29, 2009 an agreement was signed by the Company and Delek Investments and the banking corporation in which some of the encumbrances on the companies’ assets were cancelled and some of the financial covenants were cancelled. At December 31, 2009, the encumbrances listed in sections 1.20.2A and 1.20.2B(1) and the financial covenants listed in section 1.18.7 remained. 1.17.7 Financial covenants The Company and Delek Investments made the following commitments in connection with long- term bank loans, the balance of which at December 31, 2009 amounted to approximately NIS 724 million: 1. The total amount of guarantees will not exceed NIS 1 billion (NIS one and a half billion). At the reporting date the total of the guarantees securing the above-mentioned liabilities of subsidiaries amounts to approximately NIS 400 million. 2. The ratio of assets to obligations as defined by the Company and the bank will not be less than 1.2. A. The value of the assets will include the share of the Company and of the headquarters companies (as defined in the agreement) in the equity capital of investees (public companies – at market value, private companies – as presented in the financial statements) plus loans to the investees plus cash and/or the value of unencumbered cash and other financial assets in the Company and headquarters companies (as defined in the agreement). B. The liabilities will include the balance of short-term and long-term credit from banks and from others plus loans from shareholders and interested parties which were placed at the disposal of the company and the headquarters companies (as defined in the agreement) in accordance with the financial statements. 3. The ratio between the dividends and management fees received from Group companies and total administrative and general expenses and financing expenses will at no time fall below 2. 4. In addition, under the aforementioned agreement, the Company and Delek Investments are subject to the following causes for immediate repayment of the credit extended by the bank: A. If there is a change in control of the Company and/or of Delek Investments.

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B. If there is a change in the Company's control of Delek Investments / Delek Petroleum or in Delek Investments’ control of Delek Automotive. C. If Company debentures are bought back during the credit period granted by the bank and/or if early payments are made to Company debenture holders in a total accumulated sum exceeding NIS 300 million. At the date of publication of this report these companies are in compliance with the aforementioned financial criteria. 1.17.8 Credit restriction The Group is subject to the Proper Banking Management Directives issued by the Supervisor of Banks in Israel, which include, inter alia, restrictions of the volume of loans which the Bank of Israel can grant to a Single Borrower, and to the Six Largest Borrowers and the Largest Borrower Group in the bank (as these terms are defined in the directives).

1.18 Taxation

For a description of the tax laws applicable to the Company, see Note 42 to the Group’s financial statements.

1.19 Company guarantees and liens

1.19.1 Guarantees For a description of the Company's guarantees, see Note 31B to the Company's financial statements.

1.19.2 Liens Below are details of the Group’s liens at December 31, 2009 which are not attributed to any of the above segments of operation: A. Company liens − Senior fixed lien in favor of the bank of a loan of NIS 550 million (principal) extended to Delek Petroleum Ltd. in August 2007. − Senior fixed loan in favor of the bank of a loan for NIS 280 million (principal) extended to Delek Real Estate Ltd. in September 2008. B. Liens of Delek Investments Delek Investments has placed liens on various assets in favor of various Israeli banks. The main liens are these: 38,101,425 shares of Delek Automotive which constitute some 76.3% of the shares of Delek Investments in Delek Automotive. At December 31, 2009, Delek Investments held about 54.8% of the share capital of Delek Automotive. 842,644 shares of Delek Energy which constitute about 21% of the holdings of Delek Investments in Delek Energy. Delek Investments holds about 80% of the share capital of Delek Energy. C. Liens of Delek Capital 35,605,419 shares of The Phoenix constituting approximately 59% of the holdings of Delek Capital in The Phoenix. Delek Capital holds about 26.6% of The Phoenix shares. D. Liens of Delek Petroleum 2,830,332 shares of Delek Israel which constitute approximately 25% of its issued paid-up capital. Delek Petroleum holds approximately 77.4% of the shares of Delek Israel. E. For details of the guarantees and liens of Group companies in the various segments of operation, see the discussion in all segments of operation.

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1.20 Legal proceedings and insurance

For a description of the material legal proceedings to which Group companies are party, see Note 31A to the financial statements. For details of the settlement signed in the Excellence matter by The Phoenix Investments and Roni Biram and Gil and Esther Deutsch, see Note 13E(6)(a) to the financial statements. The various companies in Delek Group carry a wide variety of insurances covering various events. By the nature of things, and in the estimation of the Company, these insurances do not constitute protection against all the risks in the business operations of the Group, as described in the remaining Risk Factors sections of this report.

1.21 Business goals and strategy

The Company customarily reviews its strategic plans from time to time and revises its goals in accordance with developments in its segments of operations and business opportunities which present themselves. The Company's main goals and strategy are these: 1.21.1 Improvement of its business performance in order to achieve maximum return on capital in the long term and monitoring of business opportunities for future use. 1.21.2 Focus on material holdings with growth potential, in which the Group will be able to exert significant influence. 1.21.3 Constant monitoring of possibilities of adding value in investees. 1.21.4 Examination of bringing strategic partners into various companies in Israel and overseas. 1.21.5 Subject to identifying suitable business opportunities, expanding the Group’s overseas operations and reducing the Company's dependence on the Israeli economy. 1.21.6 Using opportunities in the relevant markets in order to make investments. 1.21.7 Expansion and diversification of the Company's sources of financing. 1.21.8 Making donations and providing assistance to the community in Israel.

1.22 Financial details concerning geographic regions

Below are details of the geographic regions in which the Group operates and its principal operations in them: Israel – Automotive, fuel products, energy, insurance and finance, infrastructures and biochemicals. USA – Fuel products, refining, energy, biochemicals and insurance. Western Europe – Fuel products and biochemicals. For further information about the geographic regions, see Note 44 to the financial statements.

1.23 Discussion of risk factors

The Company is chiefly a holding company and therefore its principal risk factors stem from those specific to each of the Group’s various segments of operation. which are described separately in the description of each segment. Aside from the risks described in those sections, below are details of additional key Group-wide risks to which the Group is exposed in Israel and overseas: 1.23.1 Changes in foreign currency rates: The Company and its investees have foreign-currency loans and the Company is consequently exposed to changes in the exchange rates of those currencies (primarily USD). Moreover, exchange rates can impact the business results of the Company and those of its investees since a material part of the Company's acquisitions and of its revenues are denominated in foreign currency. 1.23.2 Changes in interest rates: The Company and its investees have variable-interest shekel loans and the Company is therefore exposed to changes in Israeli bank interest. Some of the Group’s companies have taken variable-interest loans based on overseas interest which means that they

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are exposed to the changes in interest rates in those countries. Moreover, changes in interest rates can impact the business results of the Company and its investees. Changes in interest rates in Israel and the USA can have an adverse effect on the yield of the marketable debenture portfolios of the insurance companies held by the Company which are weighed against the insurance liabilities. 1.23.3 Economic slowdown and changes in the Group’s markets: The Group has substantial operations in various countries around the world. Changes in the markets in which it operates, particularly an economic slowdown in those markets (including Israel), could have an adverse effect on the operations of the Company and its investees, as well as on the value and liquidity of their assets, the demand for their products and their revenues. 1.23.4 Capital markets: Changes in the prices of marketable securities held by the Group expose it to risks stemming, inter alia, from capital market volatility and will affect its ability to generate capital gains from the realization of its investments. The global financial crisis which began in 2008 could have a material effect on the operations of the Company and its overseas investees, including their ability to raise capital and debt. 1.23.5 Security situation: Deterioration in the security and political situation in Israel could adversely affect companies operating in Israel, inter alia, as a result of the reluctance of foreign investors and international companies to invest in Israeli companies and do business with them. Such a deterioration in the security and political situation in Israel could lead to slowdown in the Israeli economy which would have a negative effect on the Group’s sales and its financial results. In addition, some of the Company's infrastructure installations, among them the desalination facility, power production plant and Yam Tethys installations, are relatively close to Israel’s border with the Gaza Strip which exposes them to a security threat resulting from hostile activity. 1.23.6 Changes in legislation and standards: Special laws apply to significant parts of the Group’s operations. The Group's results could be affected by changes in legislation and standards in various fields, among them antitrust laws, laws governing the obligation to issue tenders, laws governing areas such as fuel, gas, telecommunications, supervision of insurance business, control on the prices of products and services, excise rates, consumer protection, etc. In addition, changes in the policy of the authorities operating by virtue of these laws is liable to affect the Group. Similarly, some of the Group's companies operate overseas and they are liable to be affected by changes in legislation, excise, regulatory proceedings and policy in the countries in which they operate. Changes in accounting standards can affect the financial results of the Group and its investees and the ability of those investees to distribute dividends. 1.23.7 Supervision of banks: The Company and some of its investees are affected by the “Good Banking Practice" directives issued by the Supervisor of Banks in Israel, which include, inter alia, restrictions on the volume of loans that Israeli banks can extend to a Single Borrower, to the Six Largest Borrowers and to the Largest Borrower Group of a banking corporation (as these terms are defined in the directives). Consequently, the volume of loans to Group companies and to the controlling shareholder of the Company may impact, under certain circumstances, the ability of Group companies to borrow additional funds from banks in Israel, and also their ability to make investments which require bank credit, or investments in companies which have taken large volumes of credit from certain Israeli banks. 1.23.8 Licenses and franchises: Some of the companies held by the Company operate on the basis of approvals, permits, licenses or franchises given to them in Israel and abroad in accordance with the law by various authorities, inter alia, the Ministry of National Infrastructures, Ministry of Telecommunications and Ministry of Transport. Failure to comply with the terms of these approvals, permits, licenses or franchises would lead to the imposition of sanctions, fines and even cancellation of the relevant approvals by the competent authorities. Such cancellation is liable to cause substantial harm to investees whose operations depend on these approvals. Some of these licenses and franchises have time limits and are renewable from time to time, all in accordance with the conditions and provisions of the law and there is no certainty that these licenses or franchises will be renewed in future. Non-renewal of such a license or franchise could impact negatively on the profitability of the company holding such a license or franchise, and consequently also on the Company's profitability. 1.23.9 Environment: Some of the companies held by the Company, chiefly those in the fuel segment in Israel, the USA and Europe, and in the areas of refining and biochemicals, are exposed to various requirements laid down by the authorities in the matter of environmental protection in Israel and abroad. A change in legislation in this field or a change in the policy of the supervisory authorities

A-269

could impact the profitability of these companies, and consequently also the Company's profitability. 1.23.10 Changes in prices of raw materials: Some of the companies held by the Company are exposed to changes in the prices of raw materials, such as the refining sector which is exposed, which is exposed to changes in fuel prices (which affects the refining margin) or biochemicals operations which are exposed to changes in the international price of sugar. Changes in the prices of raw materials are liable to impact the profitability of the investees, and consequently also the Company's profitability. 1.23.11 Legal proceedings: Some of the companies held by the Company are subject to legal claims, including class actions, in substantial amounts. Should the companies be found liable in these legal proceedings or in any possible future legal action brought against the Company or its investees, this could negatively impact the Company’s business results. It is noted that in March 2006 the Class Actions Law, 5766-2006 was published. This law lays down a general and uniform manner for filing and managing class actions and could result in an increased number of applications for the certification of claims as class actions, thereby increasing the exposure to such lawsuits, although this depends ,inter alia, upon the interpretation that the courts will give to the new law. 1.23.12 Salary and labor relations: Material changes in the minimum wage or other material changes in the labor laws are liable to affect the results of the Company's investees and consequently also its own business results. Furthermore, strikes and labor disruptions in the investees are liable to impact negatively on the business results of the Company and of its investees. 1.23.13 Antitrust regulations: Under certain circumstances, the Group's companies are liable to be restricted in their operations because of the provisions of the Antitrust Law and individual approvals granted by the Commissioner. In addition, the Group is subject in its business, inter alia, to the provisions of the Antitrust Law as it relates to its transactions or those of its investees which constitute a merger and/or include restrictive practices, as these terms are defined in the law. Therefore, in certain cases, the Company is exposed to transactions which require approval from the Antitrust Commissioner, who could restrict and even prevent implementation of these transactions. Terms included in the merger permits granted or that will be granted by the Antitrust Commissioner in connection with the acquisition of holdings in various companies by controlling shareholders of the Company and/or companies under its control, are liable to restrict the operations of the Company and of its investees and impact on their results. 1.23.14 Restrictions on realization of holdings: The Company and some of its investees are bound by legal and contractual restrictions which could inhibit the ability of the Company and its investee companies to realize these holdings. There are liens in favor of banking institutions on some of the shares of the investees. 1.23.15 Reliance on the cash flows of investees: One of the Company's sources of capital stems from the profits distributed by its investees as dividends. Changes in the profit distribution policy of the Company's investees, changes in profitability (including those brought about by changes in accounting principles) and in the cash flows of these companies, as well as restrictions on the distribution of profits, are likely to impact the cash flow of the Company and its business operations. Furthermore, the Company's ability to raise foreign finance relies, inter alia, on the value of its holdings in the Group's companies. 1.23.16 Loans and guarantees to investees and associates: As part of its operations, the Company extended to its investees loans in material amounts as well as guarantees and collateral for various purposes such as guaranteeing financing, projects, etc. A decline in the profitability and cash flow of the investees or liquidity difficulties is liable to have an adverse effect on their ability to comply with the terms of the loans, or alternatively, to bring about the realization of guarantees extended by the Company which would cause a deterioration in its financial condition. In this context it should be noted that the Company and its subsidiaries have extended loans and guarantees in material volumes to Delek Real Estate. Most of the shares of Delek Real Estate, which was a subsidiary of the Company, were distributed as dividend in kind in May 2009, so that it is no longer controlled by the Company. The operations of Delek Real Estate were adversely affected by the global financial crisis and the global crisis in the real estate market. These factors could lead to a tightening of the conditions for obtaining financing to repay Delek Real Estate’s obligations, a decline in the demand for yield-generating assets, a decline in occupancy rates and rental which could have an adverse effect on Delek Real Estate, its share capital, the fair value of its assets and its ability to comply with the financial covenants agreed with the various credit providers. These and other risk factors of Delek Real Estate, if realized, could inhibit its ability to repay its debts to the Company, bring

A-270

about the realization of guarantees given by the Company and its subsidiaries and adversely affect the Company's financial condition. Below are the Company's estimates of the type and degree of impact of the above-mentioned risk factors on the Company: Degree of impact Risk factors Large impact Moderate impact Small impact Macro risks • Interest rate • Fluctuations in foreign • Security situation fluctuations currency rates • Situation in capital markets • Economy slowdown • Changes in laws and standards • Bank supervision • Raw materials Sectoral risks • Environment Risks specific to the • Licenses and franchises • Restrictions on realization Company • Loans and guarantees to of holdings investees and associates • Reliance on cash flows of investees • Salary and labor relations • Antitrust laws • Legal proceedings

See also reference to additional risk factors applicable to the material investees of the Group which are listed in sections 1.15-1.17 of the report.

A-271 Directors’ Report Delek Group Ltd.

March 24, 2010

Delek Group Ltd.

Directors' report on the state of the Company's affairs For the year ended December 31, 2009 The board of directors of the Delek Group Ltd. "the Company”), hereby presents the Company's Directors’ Report for the year ended December 31, 2009.

A. The Board's explanations for the state of the Company's affairs

1. Description of the Company and its business environment

The Group is a holdings and management company which controls a large number of corporations (the Company and the companies it controls are hereinafter referred to as "the Group" or "Delek Group") with a range of investments in Israel and overseas in the fields of energy, gas stations, refining, infrastructures and water desalination, finance and insurance, automobiles and biochemicals. During May 2009, a distribution of the shares of Delek Real Estate Ltd. ("Delek Real Estate") was completed as a dividend in kind to the share holders of the Company, and from that date the Company no longer operates in real estate. The Company’s financial data and its operating results are affected by the financial data and operating results of the companies it holds, and by its sale or acquisition of holdings. The Company’s cash flow is affected, inter alia, by dividends and management fees received from its investees, by receipts originating from the realization of its holdings in them, by its ability to raise foreign financing which depends, among other things, on the value of its holdings, and by investments made by the Group and the dividends it distributes to its shareholders.

2. Principal Operations

A) During the reporting year, the Company raised approximately NIS 1,450 million* of debentures, of which NIS 850 million in shekel series not linked to the CPI. In addition, during the reporting period the Company exchanged NIS 670 million of CPI-linked debt for shekel debt. B) In February 2009 the Tamar 1 drilling off the coast of Haifa ended with a commercial discovery of gas, in which Delek Drilling and Avner ("the Partnerships") each have a 15.6% share. The Tamar 1 drilling descended to a water depth of 1,680 meters and reached a final depth of 4,900 meters. In August 2009, the Partnerships announced that according to an independent assessment by engineering consultants NSAI, the average economic potential of the natural gas reserves in the Tamar field is 7.7 TCF (218 BCM). In April 2009, production tests were successfully completed in the Dalit 1 drilling. Noble Energy Mediterranean Energy Ltd., the project operator ("the Operator") estimates that the average economic potential of the natural gas reserve in the structure is in the region of 500 BCF (14.2 BCM) and of commercial discovery scope. C) In August 2009, the Board of Directors of the Company resolved to approve an investment framework of up to USD 218 for the purchase of shares of the American company Noble Energy Ltd. ("Noble"), which is traded on the New York Stock Exchange. The investment in Noble shares is stated as a financial investment classified as a financial asset available for sale. In addition, the Group entered into an agreement with a foreign bank, which provided the

* In this translation of the Directors' Report, all amounts should be understood by the reader to be rounded to the nearest million or thousand, as the case may be.

B-1 Directors’ Report Delek Group Ltd.

Group with a non-recourse credit facility of USD 120 million to be repaid by May 31, 2012. The collateral for the credit is a lien on the Noble shares purchased and/or that will be purchased. Over a period of five months ended December 31, 2009, the Company purchased Noble shares and sold them at a profit of NIS 46 million (before tax). At December 31, 2009 the balance of the investment in Noble shares is NIS 440 million and the profit from the holding is NIS 40 million and charged to capital funds in equity. D) In May 2009, Delek US completed the reconstruction of units damaged in the fire at its refinery, and the refinery resumed operation. In 2009, compensation of USD 420 million was received from the insurance companies in respect of business interruption and property damage. For details, see Section 6A below. E) In June 2009, Delek Petroleum sold 6.51% of shares of Delek Israel in consideration of NIS 95 million. As a result of the sale, the Group's holding in Delek Israel was reduced to 79.16%. Profit from the sale was NIS 31 million (before tax). F) On June 14, 2009, after protracted negotiation, a settlement agreement was signed whereby The Phoenix Investments will purchase from Messrs. Biram and Deutsch, on various dates, 40% of the shares of Excellence Investments. On August 25, 2009, after compliance with all the preconditions, the transaction was closed. In addition, on November 24, 2009, The Phoenix purchased shares accounting for 4.58% of the equity of Excellence in a transaction made off the stock exchange floor, in consideration of NIS 43 million, bringing its holding at this stage to about 65% of Excellence. G) On March 31, 2009, the Board of Directors of the Company announced the distribution of a dividend in kind, of shares it holds of Delek Real Estate, to the shareholders of the Company. The distribution was made on May 3, 2009, in such a way that each Company shareholder received approximately 8.8 shares of Delek Real Estate in respect of each Company share it holds. After the distribution, the Company retained a holding of about 5% of the shares of Delek Real Estate. H) In November 2009, the Group signed an agreement with Kol Holdings Ltd. for the sale of 9,127,271 shares of HOT Communications Systems Ltd. ("HOT"), comprising 12% of HOT's share capital, at NIS 44 per share and a total consideration of NIS 402 million. The shares were sold as is on the date of execution of the agreement. Closing the transaction depends on the approval of the Cables Council and a waiver of the right of first refusal granted to certain HOT shareholders. On December 9, 2009, the share sale was completed, after which the Group's holding in the share capital of HOT was reduced to less than 5%. The capital gain to the Group as a result of the sale, as included in the results of the fourth quarter of 2009,amounted to NIS 195 million (before tax). I) In November 2009, Delek Energy completed the swap tender offer of purchasing shares of Avner (7.63%) in consideration of an allotment of shares of Delek Energy (about 7%). In addition, the Group sold 107,750 shares of Delek Energy, comprising approximately 2.15% of the latter's shares (after completing the swap tender offer described above), to various third parties for a total consideration of NIS 94 million. After these actions, the Group holds 79.7% of the shares of Delek Energy. The capital gain in respect of the share swap and the sale amounted to NIS 290 million, and was charged to the income statement in the fourth quarter of 2009. J) On October 19, 2009, after receipt of approvals from the American Securities and Exchange Commission ("the SEC"), the Company inaugurated a Level I Sponsored Program for the issue of ADRs (American Depositary Receipts) that represent the Company's shares and which are traded over the counter in the U.S. ADRs are securities issued in the U.S. with their value denominated in U.S. dollars, convertible to the Company shares they represent and vice versa – a holder of Company shares may convert them to ADRs representing the Company's shares, all in accordance with the terms of the program. A Level I program allows private and institutional American investors to invest in the share capital of the Company by purchasing ADRs. K) After the balance sheet date, in February 2010, Delek Europe BV (held 100% by Delek Europe), filed a binding proposal for the purchase of the fuel marketing operation of BP France SA ("BP") in France, consisting of 416 BP brand gas stations, convenience stores all over France and holdings in three terminals (" the Marketing Operation"). The transaction includes receipt of an exclusive license to use the BP brand in France in the chain of gas stations. In

B-2 Directors’ Report Delek Group Ltd.

consideration of purchase of the Marketing Operation, Delek Europe offered EUR 180 million before adjustment of working capital and before other adjustments, as may be on the date of closing. On the date of filing the proposal, Delek Europe paid an advance of EUR 10 million against receipt of exclusivity from BP to negotiate the closing the Marketing Operation purchase transaction. The proposal is valid until October 15, 2010. L) The partners in the Tamar project signed the following three letters of intent (non-binding) for supplying natural gas: • On December 14, 2009, a letter of intent was signed with Dalia Power Energies Ltd. • On December 24, 2009, a letter of intent was signed with Israel Electric Corporation Ltd. ("IEC"). • On February 19, 2010, a letter of intent was signed with Power Station South Ltd. and DSI Dimona Silica Industries Ltd. For details, see Note 16G(3) to the financial statements at December 31, 2009, (Chapter C of the Periodic Report). M) During and after the reporting period, Delek Infrastructures has been working to construct another four power stations in Israel (beyond the two already operating in Ashkelon) , which are in various stages of development. For details, see Section 1.14 in Chapter A of the Periodic Report – Description of the Corporation's Business. . N) The Company announced dividends amounting to NIS 210 million in respect of the first three quarters of 2009. In December 2009 the Company announced a dividend of NIS 150 million which was paid in January 2010. After the balance sheet date, in March 2010, the Company announced a dividend of NIS 100 million in respect of 2009.

3. Results of Operations

A) Contribution of principal operations to net profit (loss) (attributed to the Company’s shareholders) from principal operations (in NIS millions):

1-3/09 4-6/09 7-9/09 10-12/09 2009 2008 2007 Fuel operations in the US (2) 97 (14) (54) 27 1 353 Fuel operations in Israel 32 29 9 12 82 62 138 Fuel operations in Europe 7 41 (2) 13 59 44 31 Expenditure on reorganization in Europe (4) - - (12) (16) (81) - Oil and gas exploration operations and gas production (34) 2 52 3 23 65 90 Expenditure in respect of abandoned oil drillings - - - - - (74) (58) Automotive operations 54 53 65 78 250 288 245 Insurance and finance operations(1) 82 6 23 70 181 (467) 285 Capital gains and others(2) 27 (5) (73) 314 263 (380) (3) Profit (loss) attributed to Company shareholders before results of real estate operations 162 223 60 424 869 (542) 1,087 Real estate operations(3) (5) - - - (5) (1,267) 210 Profit (loss) attributed to Company shareholders 157 223 60 424 864 (1,809) 1,297 (1) Comparison numbers were reclassified. (2) Included in this item are non-attributed financing expenses, tax expenses and results of other operations in respect of infrastructures and investments. In addition, in the fourth quarter of 2009, this item includes a capital gain from exchanging NIS 200 million (before tax) of Delek Energy shares, a capital gain of NIS 92 million from the sale of 2% of the share capital of Delek Energy, a capital gain of NIS 195 million (before tax) from the sale of HOT shares, a capital gain of NIS 63 million (before tax) from realization of the investment in Oil Refineries Ltd., and a capital gain of NIS 40 million (before tax) from the sale of Noble shares. The item also0 includes impairment of NIS 74 million in respect of the investment in Road Chef. (3) On March 31, 2009, the Group announced the distribution of shares of Delek Real Estate as a dividend in kind to the shareholders of the Group. The distribution was made in May 2009. Commencing April 1, 2009, the Group includes its part (5%) in the results of Delek Real Estate by the equity method. Those results are included under the Capital gains and others item.

B-3 Directors’ Report Delek Group Ltd.

B) The table below shows principal data from the Company’s consolidated income statements (in NIS millions): 1-3/09 4-6/09 7-9/09 10-12/09 2009 2008 2007 Revenue 9,118 10,765 11,919 11,645 43,447 46,240 39,118 Cost of revenue 7,482 9,158 10,245 10,147 37,032 40,549 32,929 Gross profit 1,636 1,607 1,674 1,498 6,415 5,691 6,189

Sales, marketing and operating expenses – gas stations 855 899 881 791 3,426 3,259 2,451 General and administrative expenses 422 394 403 549 1,768 1,476 1,067 Other income (expenses), net 68 199 (28) 72 311 40 (35) Profit from operating activities 427 513 362 230 1,532 996 2,636 Financing income, net 174 124 159 152 609 340 198 Financial expenses, net 308 340 531 270 1,449 1,798 1,068 Profit (loss) after financing 293 297 (10) 112 692 (462) 1,766 Profit from realization of investments in associates and others, net - 31 4 483 518 69 367 Group’s equity in profits (losses) of associates and partnerships, net 65 66 47 13 191 (12) 174 Profit (loss) before income tax 358 394 41 612 1,405 (405) 2,307 Income tax (tax benefit) 100 99 (86) 102 215 (37) 607 Profit (loss) from continuing operations 258 295 127 506 1,186 (368) 1,700 Profit (loss) from discontinued operations 17 - - - 17 (1,945) 536 Profit (loss) 275 295 127 506 1,203 (2,313) 2,236 Attributable to: Company shareholders 157 223 60 424 864 (1,809) 1,297 Non-controlling interest 118 72 67 82 339 (504) 939 275 295 127 506 1,203 (2,313) 2,236

C) Movement in other comprehensive profit (loss) (in NIS millions):

1-3/2009 4-6/2009 7-9/2009 10-12/2009 2009 2008 Net profit (loss) 275 295 127 506 1,203 (2,313) Other comprehensive profit (loss): Profit (loss) in respect of financial instruments available for sale, net 233 10 17 25 285 (377) Profit (loss) in respect of cash flow hedging, net (108) 6 2 (15) (115) (13) Adjustments for translation of financial statements of overseas operations 316 (163) (176) 42 19 (2) Company equity in other comprehensive profit (loss) of associates 47 (36) (21) 22 12 6 Other comprehensive profit (loss) from ongoing operations, net 488 (183) (178) 74 201 (386) Other comprehensive profit (loss) from discontinued operation 198 - - - 198 (1,262) Total other comprehensive profit (loss) 686 (183) (178) 74 399 (1,648) Total comprehensive profit (loss) 961 112 (51) 580 1,602 (3,961) Attributed to: Company shareholders 603 100 (70) 480 1,113 (2,818) Non-controlling interest 358 12 19 100 489 (1,143) 961 112 (51) 580 1,602 (3,961)

B-4 Directors’ Report Delek Group Ltd.

D) 2009 compared with 2008 It is noted that the distribution of Delek Real Estate shares as a dividend in kind to the Company's shareholders, the results of Delek Real Estate were reclassified in income statements for periods prior to the distribution to the Profit (loss), and the explanations below do not include the effects of Delek Real Estate on the financial statements for prior periods. Income from operating activities The Group’s income in 2009 amounted to NIS 43.4 billion compared with NIS 46.2 billion in 2008. In 2009 the decrease in the Group's income stems from the fuel marketing companies in Israel, the U.S. and Europe, primarily due to the global decline in fuel prices during the year compared with 2008, which was offset by an increase in income from investments in insurance and finance in 2009 compared with 2008. For additional details about income from the operation and the change in them, see Note 45 to the financial statements – Information about segments of operation. Operating profit Operating profit in 2009 amounted to NIS 1,532 million, compared with NIS 996 million in 2008. The increase stems mainly from the improvement in the insurance and finance segment in 2009 compared with 2008. For more details about operating profit, see Note 45 to the financial statements – Information about segments of operation. Financing expenses, net The Group’s financing expenses in 2009 amounted to NIS 840 million compared with NIS 1,458 million in 2008. The decrease in financing expenses stems mainly from the fact that in 2008, the Company recorded NIS 230 million in impairments in respect of negotiable securities, whereas in 2009 it recorded profits of NIS 280 million from realizations and a rise in value of negotiable securities. An additional cause, among others, for the change in the financing results is the decline in the rate of rise in the CPI in 2009 compared with 2008 (3.8% in 2009 and 4.5% in 2008). Profit from realization of investments in investees, net This item includes capital gains from realizations made by the Group during 2009, principally these: capital gain of NIS 200 million charged as a result of an issuance of Delek Energy shares in exchange for Avner shares; capital gain of NIS 90 million from the realization of 2% of the share capital of Delek Energy, and capital gain of NIS 195 million from the sale of HOT shares. In 2008, this item included mainly profit of NIS 43 million from the sale of shares of Delek Automotive Systems. E) 2008 compared with 2007 Income from operating activities The Group's income in 2008 amounted to NIS 46.2 billion, compared with NIS 39.1 billion in 2007. The increase stemmed mainly from an increase in revenue from the sale of fuels in Israel, the U.S. and Europe, from an increase in revenue of the U.S. refinery, and from an increase in revenue from Delek Automotive. Conversely, revenue from investment in the insurance segment in Israel decreased. Operating profit Operating profit in 2008 amounted to NIS 996 million, compared with NIS 2,636 million in 2007. The decrease stemmed mainly from the insurance segment in Israel and the U.S., and from interruption of the operation of the refinery in the U.S. For more information about operating profit results, see Note 45 to the financial statements – Segments of operation. Financing expenses, net The Group’s financing expenses in 2008 amounted to NIS 1,458 million compared with NIS 870 million in 2007. The increase in financing expenses stemmed mainly from impairment of NIS 230 million in the value of negotiable securities in 2008. Another cause of the change in the financing results was the sharp increase in the rate of rise of the CPI compared with 2007 (4.5% in 2008, 2.8% in 2007). Group’s equity in profits of associates and partnerships, net The Group’s equity in the losses of associates and partnerships in 2008 amounted to NIS 12 million compared with a profit of NIS 174 million in 2007.

B-5 Directors’ Report Delek Group Ltd.

4. Financial condition

Total assets of the Group at December 31, 2009 amounted to NIS 84.3 billion, compared with NIS 76.7 billion on December 31, 2008. Below is a description of the principal changes in assets and liabilities at December 31, 2009 compared with December 31, 2008: Cash and cash equivalents and short-term investments The Group has cash and short-term investment balances of NIS 4.5 billion, consisting mainly of balances of NIS 1.3 billion in the Company, Delek Investments and Delek Petroleum, NIS 0.4 billion in Delek Israel, NIS 0.4 billion in Delek Benelux, NIS 0.7 billion in The Phoenix, NIS 0.5 billion in Delek Energy and NIS 0.7 billion in Republic. Total current assets Total current assets at December 31, 2009 amounted to approximately NIS 33.4 billion compared with approximately NIS 15 billion on December 31, 2008. The increase stems mainly from the first-time consolidation of the assets of Excellence (mostly basket certificates) amounting to NIS 16 billion. Assets held for sale The total balance of the Group's equity (25%) in the investment in Road Chef at December 31, 2009, which was designated available for sale in 2008, is NIS 177 million. For more details about Road Chef, see Note 14M(2) to the financial statements. Investment real estate The changes in this item compared with the balance on December 31, 2008, stem primarily from the distribution of the shares of Delek Real Estate as a dividend in kind, following which the assets of Delek Real Estate (most of which were investment real estate) are no longer consolidated in the financial statements of the Group. Balance of short- and long-term financial liabilities Total financial liabilities (to banks, debenture holders and others) at December 31, 2009 amounted to NIS 19.6 billion, compared with NIS 31 billion on December 31, 2008. Most of the decrease stems from termination of the consolidation of Delek Real Estate in 2009, which reduced the debt balance by NIS 15 billion. Contingent claims The Company’s auditors draw attention, in their letter of opinion, to lawsuits against investees. For details, see Note 33A to the financial statements. Additional information For additional information regarding payments of principal and interest in respect of debts of the headquarter companies, see Appendix A to this Directors’ Report.

5. Sources of Finance, and Liquidity

The Company's surplus financial liabilities (in its separate statements) at December 31, 2009 amounted to NIS 820 million. (It is emphasized that the Delek Group shares held by the Group were taken as a financial asset in this calculation.) Surplus financial assets over financial liabilities of Delek Investments (in its separate financial statements) at December 31, 2009, amounted to NIS 323 million. It is emphasized that the investments of Delek Investments in the shares of Menorah Holdings Ltd. and Oil Refineries Ltd. were taken as financial assets in the calculation of its surplus financial liabilities, net. Surplus financial liabilities (in the separate statements) of Delek Capital Ltd. and Delek Finance US Inc. (the direct parent of Republic), at December 31, 2009, amounted to NIS 2,522 million. Surplus financial liabilities of Delek Petroleum (in its separate statements) at December 31, 2009 amounted to NIS 302 million. This item includes the investment in Road Chef as a financial asset. Surplus financial liabilities (in the separate statements) of Delek Europe Israel Ltd. (the direct parent of Delek Benelux) at December 31, 2009 amounted to NIS 739 million.

B-6 Directors’ Report Delek Group Ltd.

Surplus financial liabilities (in the separate statements) of Delek Hungary (the direct parent of Delek US) at December 31, 2009 amounted to NIS 33 million. Surplus financial liabilities includes obligations to banks and other credit providers (including the companies of the Group) net of cash and cash equivalents, commercial paper and bank balances. Total financial liabilities of the HQ companies at December 31, 2009 amounted to NIS 4.093 billion. Prior to the date of approval of the financial statements, the Company and the headquarters companies have free cash balances and liquid investments of NIS 1.8 billion. Raising debt A) During March 2009, in agreements with banks, NIS 150 million in new credit was made available to the Company, and NIS 300 million of loans was refinanced. B) During the reporting year, the Company (separately) completed the raising of NIS 1,450 million of debentures, of which NIS 850 million in shekel series not linked to the CPI. In the same period, the Company completed a swap of NIS 670 million of CPI-linked debt for shekel debt. For a more detailed explanation of raising debt through debentures, in 2009 , see Note 28B to the financial statements.

6. Analysis by Segment of Operation

A. Fuel operations in the U.S. Delek US results as included in the Company’s consolidated financial statements:

4-6/2009 1-3/2009 Refining and Convenience Refining and Convenience marketing stores and marketing stores and operations gas stations Total operations gas stations Total NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions Income 1,025 1,473 2,498 294 1,219 1,513 Gross profit (loss) 63 177 240 (10) 171 161 Operating results 240 6 246 44 (18) 26 Expenses not allocated 10 3 to segments Operating profit 236 23 Financing expenses, net 31 19 Equity in losses of

associates - - Net profit (loss) 136 (2)

10-12/2009 7-9/2009 Refining and Convenience Refining and Convenience marketing stores and marketing stores and operations gas stations Total operations gas stations Total NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions Income 1,781 1,415 3,196 1,759 1,447 3,206 Gross profit (loss) (36) 152 116 (25) 192 167 Operating results 3 (38) (35) (10) 14 4 Expenses (income) not allocated to segments 32 12 Operating loss (67) (8) Financing expenses, net 32 18 Loss (80) (21)

B-7 Directors’ Report Delek Group Ltd.

2009 2008 Refining and Convenience Refining and Convenience marketing stores and marketing stores and operations gas stations Total operations gas stations Total NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions Income 4,859 5,554 10,413 10,030 7,088 17,118 Gross profit (loss) (8) 692 684 139 834 973 Operating results 277 (36) 241 42 146 188 Expenses (income) not allocated to segments 57 74 Operating profit 184 114 Financing expenses, net 100 76 Equity in profits of - 31 associates Net profit 33 3

Delek US operates a refinery with a maximum daily capacity of 60,000 barrels, a crude oil pipeline and a system of terminals for marketing fuel in Texas, USA, as well as gas stations and convenience stores in eight neighboring states in the Southeast United States. In addition, Delek US holds about 35% of Lion Oil, which operates an oil refinery with a capacity of 75,000 barrels per day, in El Dorado, Arkansas. The Company's holding in Delek US at the balance sheet date is approximately 74%. Delek US is a listed company in the USA. Analysis of the results of the fuel operations in the U.S. Refining and marketing operation The contribution of refining and marketing to the results of operations in 2009 was approximately NIS 277 million, compared with NIS 42 million in 2008. The financial results of the refining segment in 2009 were affected by insurance payments of NIS 419 million, recorded as income in 2009. Eliminating the income from the insurance company received in respect of property damage, the profitability of the refining operation declined in 2009 compared with 2008. Profit in he defining segment in 2009 plus inter-company marketing commissions amounted to USD 7.07 per barrel sold, compared with USD 10.05 per barrel sold in 2008. The 5-3-2 refining margin in the Gulf of Mexico region was USD 5.97 per barrel during the during the period of operation of the refinery in 2009, compared with USD 11.13 per barrel in the period of operation in 2008. In addition, direct operating expenses per barrel in 2009 increased by about USD 2 because the refinery operated only 228 days in 2009 compared with 324 days in 2008. Daily sales in 2009 averaged 51,823 barrels, compared with 56,609 barrels per day in 2008. Gas station and convenience store operations The contribution of the gas station and convenience store segment amounted to approximately NIS 36 million, compared with NIS 146 million in 2008. The decrease in the contribution of the segment in 2009 stemmed mainly from a decline in the profitability of fuel sales compared with 2008. A positive trend is apparent, however, in convenience store sales and in fuel sales, a sign that the economy is stabilizing. In the fourth quarter of 2009, same-store sales increased both in products and in fuels, by 5% and 4% respectively. The rise in sales stems, inter alia, from an increase in sales at stores that have been refurbished and rebranded in recent years. The profitability of fuel sales was 13.6 cents per gallon in 2009, compared with 19.8 cents per gallon in 2008. Product sales in the convenience stores in 2009 amounted to USD 385.6 million, compared with USD 387.4 million in 2008. Gross profit from products sales in the convenience stores in 2009 was 30.9%, compared with 31.7% in 2008.

B-8 Directors’ Report Delek Group Ltd.

Additional information It is noted that there are a number of differences between the financial results of Delek US according to US GAAP as published, and their inclusion in the financial statements according to IFRSs applied in Israel. The principal difference stems from a different accounting policy for the treatment of inventory – in the US, the cost of inventory is according to LIFO, whereas IFRSs require the application of average method. For more information about the operations of Delek US, see Note 14I to the financial statements and Section 1.7 in Chapter A of the Periodic Report – Description of the Corporation's Business. B. Fuel Operations in Israel Below are data from the financial statements of Delek Israel: 10-12/2009 7-9/2009 4-6/2009 1-3/2009 2009 2008 NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions Income 1,211 1,180 1,043 856 4,290 5,813 Gross profit 174 200 189 174 737 670 Operating profit 41 72 68 48 229 220 EBITDA 61 91 85 67 304 310 Financing expenses, net 20 59 33 1 113 110 Profit before equity in results of 18 13 35 39 105 80 associates Delek Israel’s equity in results of 5 (1) (22) (7) (6) (9) associates Net profit 11 7 40 38 96 58 Attributable to: Shareholders of the Company 10 5 38 37 90 50 Non-controlling interest 1 2 2 1 6 8 11 7 40 38 96 58

Delek Israel's operations include marketing and distribution of fuel products, operation of gas stations and the Menta chain of convenience stores. It has three main segments of operation – fuel and commerce compounds, which includes the Group's operations at public gas stations; direct marketing, which includes the Group's operations in the marketing and distribution of oil products to its customers outside the fuel and commerce compounds, and fuel storage and issue. Net sales Sales net of government levies ("Net Sales") in 2009 amounted to NIS 4,290 million, compared with NIS 5,813 million in 2008. Net Sales in the fourth quarter of the year amounted to NIS 1,211 million, compared with NIS 917 million in the corresponding period in 2008. The decrease in Net Sales between 2009 and 2008, NIS 1,523 million, is about 26%. The decrease is explained primarily by the lower average prices of fuels in 2009 compared with 2008. In 2009, quantities also decreased in the direct marketing segment, as a result, among other things, of the slowdown in economic activity compared with the prior year, the decline in marine fueling operations, and the narrower exposure in this segment in view of the selective and cautions choice of sales in the segment. It is noted that this decline is partially offset by an increase in sales of Delek Israel's convenience stores (due to a rise in same store sales and the opening of new convenience stores during the year), and by an increase in the quantity of fuels sold in the fuel and commerce compounds segment. Comparison between the fourth quarters of 2009 and 2008 shows an increase of NIS 290 million in net sales this year – an increase of 32% compared with last year. The increase is explained mainly by the change in fuel prices between the periods, an increase in convenience store sales, and in increase in the quantity of fuels sold in the fuel and commerce compounds segment.

B-9 Directors’ Report Delek Group Ltd.

Gross profit Gross profit in 2009 was NIS 737 million, compared with NIS 670 million in 2008. Gross profit in the fourth quarter of the year was NIS 174 million, compared with NIS 80 million in the fourth quarter of 2008. In the reporting year, gross profit increased as a result, inter alia, of continued conversion of stations to self-service, an increase in quantities in the segment and an increase in same store sales in Delek Israel's chain of convenience stores, and an increase in gross profit in the storage and issue segment. The increase was offset by a decrease in gross profit in the direct marketing segment, mainly the result of to smaller quantities sold in the that segment due to the economic slowdown in the reporting period compared with last year, a decrease in the volume of activity and erosion of the profits of marine fueling operations and Delek Israel's selective and cautious choice of sales, as well as erosion of profitability in the direct marketing segment compared with 2008. In addition, inventory losses accrued in material amounts to Delek Israel in 2008 due to the collapse of fuel prices at the end of that year. The total impact of the change in inventory losses between the periods amounted to NIS 70 million and NIS 67 million for the year and the quarter ended December 31, 2009, respectively, compared with the prior year. Sales, gas station operation and general and administrative expenses These expenses in 2009 amounted to NIS 510 million, compared with NIS 450 million in 2008. In the fourth quarter of the year, these expenses amounted to NIS 136 million, compared with NIS 119 million in the same period in 2008. Most of the increase in the reporting period is due to an increase in gas station operating expenses as a result of the transition of the stations to self-service, and an increase in the number of gas station and convenience store compounds, to an increase in station rent expenses due to rising rents and an increase in the number of stations leased by Delek Israel. Furthermore, the wage expense increased, due mainly to the grant of stock options to the incoming CEO of Delek Israel and a provision for the retirement of the outgoing CEO. Operating profit Operating profit in 2009 amounted to NIS 229 million compared with NIS 220 million in 2008. Operating profit in the fourth quarter of the year amounted to NIS 41 million, compared with NIS 39 million in the same period in the prior year. Financing expenses, net Net financing expenses in 2009 amounted to NIS 113 million, compared with NIS 110 million in 2008. The increase in financing expenses is explained by an increase in bank and non-bank credit compared with 2008, and conversely by a decrease in the financing expenses due to an increase in dividends received from financial assets available for sale and due to a decline in the rate of rise in he CPI compared with 2008 (3.8% in 2009, compared with 4.5% in 2008). Net financing expenses in the fourth quarter of the year amounted to NIS 20 million, compared with NIS 16 million in the same period last year. For more information about the operations of Delek Israel, see Note 14K to the financial statements and Section 1.8 in Chapter A of the Periodic Report – Description of the Corporation's Business.

C. Fuel operations in Europe Fuel operations in Europe are managed under consolidated company Delek Benelux BV ("Delek Benelux") and consist of about 850 gas stations in Belgium, Holland and Luxembourg (“Benelux Fuel Operation”). The Benelux Fuel Operation also includes marketing and distribution of fuels and oils, operation of gas stations, operation of a chain of convenience stores and bakeries, and carwash facilities. In 2008, Delek Benelux bought out the partners in three ventures in which it had holdings, and became the owner of all the shares of those partners. In 2009 Delek Benelux completed the relocation of its offices from Rotterdam and Brussels to a single site in Breda, Holland. In addition, as part of its strategic plan, Delek Benelux started development of a new concept for the operation of convenience stores under a private brand it has established – GO the fresh way. IN 2009 Delek Benelux also expanded is operation in stations along expressways in Belgium and has opened four restaurants and one hotel

B-10 Directors’ Report Delek Group Ltd.

Condensed balance sheet of Delek Benelux at December 31, 2009 and 2008 (in euro millions)

At December At December 30, 2009 30, 2008 Cash 81 43 Current assets (excluding cash) 195 167 Investments in investees and long-term debit balances 29 32 Property, plant and equipment, net 226 228 Other assets, net 234 241 Short-term loans and credit 44 49 Current liabilities (excluding short-term loans) 262 200 Long-term loans 297 295 Other long-term liabilities 44 38 Equity* 118 129

* Equity balance at December 31, 2009, eliminating the negative balance of a capital fund in respect of hedging transactions for a variable-to-fixed interest rate swap, amounts to EUR 134 million.. Data from the income statement of Delek Benelux (in euro millions)

1-3/2009 4-6/2009 7-9/2009 10-12/2009 1-12/2009 1-12/2008 Income 456 486 492 518 1,952 2,776 Gross profit 53 63 58 56 230 223 Operating profit (1) 12 7 - 18 7 Equity in profits of investee - 2 2 3 - - partnerships EBITDA 9 20 16 12 57 54 Net profit (loss) 1 7 - - 8 (9)

Analysis of Delek Benelux’s results in the reporting periods Income Income in 2009 amounted to EUR 1,952 million, compared with EUR 2,776 million in 2008. The decrease .The decrease stems primarily from the decline in fuel prices in 2009 compared with 2008. Income in the fourth quarter of 2009 amounted to EUR 518, compared with EUR 492 in the third quarter of 2009. Gross profit Gross profit in 2009 amounted to EUR 230 million, compared with EUR 223 million in 2008. The improvement in gross profit was achieved mainly by continued growth in the convenience store segment. Operating profit Operating profit 2009 amounted to EUR 18 million, compared with EUR 7 million in 2008. Eliminating one-time expenses in respect of reorganization (unification and relocation of offices) and adjustment of goodwill, operating profit in 2009 was EUR 26 million compared with EUR 23 million 2008, and increase of about 13%. The increase in operating profit stems from the increase in gross profit in the reporting period. EBITDA EBITDA (operating profit after elimination of depreciation and amortization and of a one-time provision for reorganization) in 2009 was EUR 57 million, compared with EUR 54 million in 2008, an increase of 6%. The increase in EBITDA stems from the increase in gross profit from fuel sales and from convenience store sales. For more information about the operations of Delek Benelux, see Note 14J to the financial statements and Section 1.9 in Chapter A of the Periodic Report – Description of the Corporation's Business.

B-11 Directors’ Report Delek Group Ltd.

D. Oil and Gas Exploration and Gas Production Operations in Israel are carried out through Delek Drilling Limited Partnership (“Delek Drilling”) and Avner Oil Exploration Limited Partnership (“Avner”) (together, "the Partnerships”), which are partners in the Yam Tethys project (together with Delek Investments) in the Tamar and Dalit drillings and in other oil rights off the coast of Israel. Overseas operations are carried out by subsidiaries of Delek Energy Systems Ltd. (“Delek Energy” or “DES”), which concentrate mainly on the following operations: − Delek Energy (Vietnam) LLC (“Delek Vietnam”) focused on oil and gas exploration in Vietnam. On realization of the asset in Vietnam, see Note 16E to the financial statements. − On February 11, 2008, DES closed the acquisition of 100% of the capital of Elk Resources ("Elk"). Elk is a private company registered in the U.S., which produces and sells oil and gas, develops existing oil and gas assets and engages in low-risk oil and gas exploration. − 83.49% of the rights in AriesOne LP ("AriesOne"). − 29.25% of the capital of Matra Petroleum Plc ("Matra"), which owns the Sokolovskoe oil discovery in Russia. Material events during the reporting period 1. During the reporting period, significant developments occurred in the exploration activities of the Partnerships (for full details, see Note 16 to the financial statements), which included these: • The Dalit 1 drilling, which culminated in a commercial discovery. • Completion of the Tamar 2 assessment drilling. For details, see Note 16 to the financial statements. 2. On July 20, 2009, Delek Energy entered into an agreement with Premier Oil Group ("Oremier") for the sale of all of Delek Energy's holdings in Vietnam for a cash consideration of USD 83.9 million. 3. In August 2009 a memorandum of principles was signed between the partners in Yam Tethys Group and Israel Electric Corporation Ltd. ("IEC"), for the supply of an additional 1 BCM of gas commencing July 1, 2009 for five years – a total of 5 BCM. The financial volume o the engagement (relative to 100% of the rights in Yam Tethys Group) is estimated at USD 1 billion. Actual income of Yam Tethys group from the sale of the additional quantities to IEC will be influenced by all the terms, and principally – global fuel prices, the supply regimen, etc. The price of supplying the gas according to the new memorandum is significantly higher than the price at which IEC purchases natural gas pursuant to the 2002 gas supply agreement. The parties reached agreement as to how the additional quantity of gas pursuant to the above memorandum will be divided out of the quantity of gas supplied to IEC in the period from July 1, 2009. 4. In November 2009, Delek Energy published a shelf offering of a swap tender offer, in which it addresses holders of the participation units in Avner Oil Exploration Limited Partnership (an associate partnership) (except for Delek Energy, Delek Investments and Assets Ltd. and an associate), with an offer to purchase from them 325,899,000 participation units of NIS 0.01 par value each in exchange for up to NIS 517,300 ordinary shares of NIS 1 par value of Delek Energy (i.e. one share of Delek Energy will be given for every 630 participation units). Acceptance notices were received from the holders of 247,926,781 participation units in Avner (accounting for 7.63% of all the participation units in Avner), in exchange for which Delek Energy issued 393,535 ordinary shares. As a result, the percentage of Delek Energy's holding in Avner rose to 45.55% and the Group's holding in Delek Energy will fall to 81.9%. In addition, the Group sold 2.15% of the share capital of Delek Energy, as a result of which the Group's holding fell to about 79%.

B-12 Directors’ Report Delek Group Ltd.

Below are the results of the oil and gas exploration operations as included in the Group's results.

1-3/2009 4-6/2009 7-9/2009 10-12/2009 2009 2008 NIS millions NIS millions NIS millions NIS millions NIS millions NIS millions Income 90 83 152 125 450 490 Operating profit 34 26 81 46 187 155 EBITDA 61 52 118 75 306 273 Financing expenses (income), 64 26 23 34 147 69 net Group's equity in results of Avner (3) 4 29 2 32 (27) and other associates Net profit (loss) (34) (2) 52 2 22 (9) Gas sales in BCM* 0.7 0.6 0.9 0.7 2.9 3.5 * The data relate to sales of gas by the entire Yam Tethys group, rounded to one tenth of one BCM:

Analysis of the results of operations in the gas segment Income In 2009, the segment's income from the sale of gas and oil, net of royalties, was NIS 450 million, compared with NIS 460 million in 2008. The income item was affected by the decrease in the quantities of gas sold in Israel in 2009 compared with 2008, due to a significant drop in gas consumption at IEC in the first two quarters of 2009 compared with the first two quarters of 2008. Delek Energy believes that the reasons for this are these: reduced consumption of electricity stemming from the comfortable weather conditions in the spring and winter of 2009, and slower economic activity, a malfunction that shut down one of the IEC production units that operates on natural gas, a change in IEC's fuel usage model due, inter alia, to a decline in coal prices and the sales of gas to IEC by EMG. Despite this decrease in the quantities of gas sold, there as no material change in the level of income, which is attributed to the rise in the selling prices of gas as a result of dollar-shekel exchange rate differences. Operating profit Operating profit in the reporting period amounted to NIS 187 million, compared with NIS 155 million in 2008. In 2008, oil and gas exploration expenses of NIS 74 million were mainly in respect of drillings in the North Sea and Vietnam which were abandoned. Financing expenses, net Financing expenses, net in the reporting period amounted to NIS 147 million, compared with NIS 69 million in 2008. Net financing expenses include expenses of NIS 42 million in respect of hedging oil and gas prices, compared with financing income of NIS 58 million in respect of hedging in 2008. In 2008, financing expenses were recorded in respect of impairment of the fair value of shares available for sale of Nexus, for which the loss amounted to NIS 38 million. Equity in the results of Avner and other associates In 2009, losses of NIS 26 million in respect of investments in foreign associates of Delek Energy were included, compared with a loss of NIS 95 million in 2008. Additional information For more information, see Notes 14L and 16 to the financial statements and Section 1.11 in Chapter A of the Periodic Report – Description of the Corporation's Business.

B-13 Directors’ Report Delek Group Ltd.

E. Automotive operations Following are the results of operations of Delek Automotive Systems Ltd. (“Delek Automotive”):

1-3/2009 4-6/2009 7-9/2009 10-12/2009 2009 2008 Income 1,033 964 1,447 1,300 4,744 4,770 Gross profit 129 91 168 137 525 938 Sales, marketing, general and 20 15 68 71 16 17 administrative expenses Operating profit 112 74 149 122 457 871 EBITDA 116 77 152 126 471 884 Financing income (expenses) 6 51 3 47 107 (158) Net profit (loss) 90 103 112 129 434 504

At the balance sheet date, the Group holds 54.97% of Delek Automotive (Delek Automotive is a public company whose financial statements are published). Below is an analysis of the results of operations of Delek Automotive in the reporting periods: Breakdown of vehicle sales in the units:

1-3/2009 4-6/2009 7-9/2009 10-12/2009 2009 2008 Sales of Mazda vehicles 6,169 6,462 9,278 9,776 31,685 31,537 Sales of Ford vehicles 3,325 2,024 4,203 2,973 12,489 11,634 Total vehicle sales 9,494 8,486 13,481 12,713 44,174 43,171 Delek Automotive’s market share out of total vehicle sales 24% 22% 28% 25% 25% 22% in Israel (MOT data)

In 2009, Delek Automotive completed 14 consecutive years of leadership in the Israeli automotive market, and sold a record 44,174 vehicles. Even though the first half of 2009 was characterized by the slowdown that commenced in the fourth quarter of 2008, it nevertheless ended with sectoral sales of about 176,000 vehicles, compared with 198,000 in 2008, and Delek Automotive's market share reached 25% by annual average. Net profit Net profit of Delek Automotive in 2009 amounted to NIS 434 million, compared with NIS 504 million in 2008. Net profit in the fourth quarter was NIS 129 million compared with NIS 21 million in the same quarter in 2008 (the loss in 2008 was generated mainly in the financing item, as a result of the strengthening of the Japanese yen by about 30%, and the loss recorded in respect of the value of an investment in negotiable securities). The gross profit margin eroded this year and fell to 11%, with most of the erosion in vehicle sales, due primarily to the strengthening of the import currencies, but even as the profitability of sales eroded in 2009, in spare parts it increased. Income Sales turnover for the year amounted to NIS 4,744 million compared with NIS 4,770 million in 2008. In the accounting year, 44,174 vehicles were sold compared with 43,171 in 2008. Sales turnover in the fourth quarter of the year amounted to NIS 1,300 million compared with NIS 539 million in the same quarter in 2008, as a result of the number or vehicles sold: 12,713, compared with 4,287 in the fourth quarter of 2008. Sales, marketing, general and administrative expenses Sales and marketing expenses in 2009 amounted to NIS 40.5 million compared with NIS 39.5 million in the prior year, and include expenses in respect of the launch of the new Mazda 3. General and administrative expenses amounted to NIS 27.8 million compared with NIS 31.3 million in the prior year. Most of the decrease stems from a decline in expenses of share-based payment to employees.

B-14 Directors’ Report Delek Group Ltd.

Financing income, net In 2009 Delek Automotive generated net financing income of NIS 107 million, stemming mainly from a rise of NIS 64 million in the value of its investment in negotiable securities (Ford shares), from recording NIS 34 million in results and fair value of hedging transactions, from interest debits to customers amounting to NIS 15 million, and NIS 12 million in revaluation of trade payables. The financing expenses that offset this income – NIS 18 million – were mainly to banks. In 2008, Delek Automotive generated net financing expenses of NIS 158 million, mostly in the fourth quarter of that year, as a result of the strengthening of the Japanese yen and also the decline in the value of the investment in negotiable securities. In the fourth quarter of 2009 Delek Automotive generated financing income of NIS 47 million compared with NIS 109 million in the fourth quarter of 2008. Income in respect of revaluation of trade payable balances in the fourth quarter was NIS 17 million, and the change in the value of the investment in negotiable securities amounted to NIS 23 million in the quarter. Additional information For more information, see Section 1.10 in Chapter A of the periodic Report – Description of the Corporation's Business. F. Insurance and Finance Operations Most of the Group's holdings in the insurance and finance segment are concentrated under Delek Capital Ltd., in which the Delek Group holds 94%, with the exception of a 27% direct holding of Delek Investments in The Phoenix Holdings Ltd. At the reporting date, the Group holds approximately 54% of the shares of The Phoenix Holdings Ltd. and all the shares of Republic, which is an elementary insurance company operating in the U.S. 1) The Phoenix Holdings Ltd. ("The Phoenix") The Phoenix Insurance – Capital requirements at December 31, 2009: On March 29, 2009, The Phoenix invested NIS 200 million in a subsidiary, The Phoenix Insurance, in consideration of an allotment of shares, in order to increase the equity (as defined in the Supervision of Financial Services (Insurance) (Minimum equity required of an insurer) Regulations, 5758-1998)) of The Phoenix Insurance. On August 31, 2009, The Phoenix issued NIS 500 million of liability certificates (series A) in order to raise capital. The equity of the Phoenix Insurance at December 31, 2009, as defined in the Supervision of Insurance Business (Minimum equity required of an insurer) Regulations, 5758-1998 and its amendments ("the Capital Regulations") is NIS 662.6 million higher than the minimum equity required under those regulations.

B-15 Directors’ Report Delek Group Ltd.

Below are the principal data (in NIS millions) from the consolidated financial statements of The Phoenix:

1-12/2009 1-12/2008 1-12/2007 10-12/2009 10-12/2008 Profit (loss) from life assurance and long-term savings segment 145.6 (143.5) 176 30.3 (73.2) Profit (loss) from general insurance segment 118.0 (303.4) 134.6 21.4 (280.5) Profit from health insurance segment 162.7 80.4 122.4 45.2 14.6 Profit from financial services segment 13.1 - - 8.0 - Total profit (loss) from segments of operation 439.4 (366.5) 433.0 104.9 (339.1) Change in liability in respect of an option to acquire an investee - (5.7) 43.9 - (28.5) Income less expenses not attributed to segments of operation (133.6) (232.5) 22.6 (6.9) (167.8) The Phoenix's equity in the net results of investees 40.7 44.0 98.1 28.7 5.9 Profit (loss) before income tax 346.5 (560.7) 597.6 126.7 (529.5) Income tax (tax benefit) 98.6 (172.3) 175.2 26.8 (157.2) Profit (loss) for the period 247.9 (388.4) 422.4 99.9 (372.3) Profit (loss) for the period attributable to shareholders of The Phoenix 227.2 (387.8) 417.2 92.0 (369.0)

The 2009 results from the segments of operation of The Phoenix were a profit of NIS 439.4 million, compared with a loss of NIS 366.5 million in 2008 and a profit of NIS 433 million in 2007. In the fourth quarter of 2009 the profit of The Phoenix amounted to NIS 104.9 million compared with a loss of NIS 339.1 million in the fourth quarter of 2008. The principal factors in the transition from loss in 2008 to profit in 2009 are the significant rise in investment profits in all segments of operation, and the consolidation of the finance segment in the financial statements commencing in the reporting period. The transition to loss in 2008 from profit in 2007 is explained by the capital market crisis, which resulted in heavy investment losses in the various investment channels, in addition to the significant rise in the rate of inflation in 2008. In 2009, net profit amounted to NIS 247.9 million compared with a loss of NIS 388.4 million in 2008 and a net profit of NIS 422.4 million in 2007. In the fourth quarter of 2009, profit amounted to NIS 99.9 million, compared with a loss of NIS 372.3 million in the fourth quarter of 2008. In the reporting period The Phoenix recorded an expense, net of tax, of NIS 31.4 million following impairment of intangible assets attributed to Excellence, In addition, The Phoenix Agencies recorded a one-time expense of NIS 16 million in respect of amortization of goodwill and intangible assets of insurance agencies it owns. The improvement in net profit stemmed mainly from the transition from loss to profit in the segments of operation. In addition, the profit in 2009 includes a tax benefit of NIS 29.8 million due to a decrease in tax rates. Material events during and after the reporting period a) On March 19, 2009, Standard & Poor's Maalot Ltd. ("Maalot") announced that it was lowering its rating for the deferred liability certificates of The Phoenix Insurance to 'ilAA-' from 'ilAA', and setting a negative outlook for the rating of The Phoenix Insurance. In addition, Maalot announced that it was lowering of the rating for the debentures of The Phoenix Holdings to 'ilA' from 'ilAA' and setting a negative outlook for the rating of The Phoenix Holdings.

B-16 Directors’ Report Delek Group Ltd.

b) On March 19, 2009, it was decided to appoint Mr. Eyal Lapidot as CEO of The Phoenix and of The Phoenix Insurance, and to enter into an employment agreement with him, effective from September 1, 2009. c) On March 29, 2009, The Phoenix Investments invested NIS 200 million in The Phoenix insurance, in consideration of an allotment of shares, in order to increase the equity of The Phoenix Insurance. d) On a rights issue in the reporting period, see Note 14H3 to the financial statements.

Analysis of life assurance and long-term saving Life assurance In 2009, the life assurance sector posted a profit of NIS 96.1 million, compared with a loss of NIS 147.4 million in 2008 and a profit of NIS 174.9 million in 2007. The transition from loss in 2008 to profit in 2009 is due mainly to an increase in investment income as a result of emerging from the economic crisis in the reporting period, despite the decline in new sales and a rise in the cancellation rate, which speeded the reduction of deferred acquisition expenses and the financial expenses of the segment. in the fourth quarter of 2009 profit amounted to NIS 18.6 million compared with a loss of NIS 74.2 million in the fourth quarter of 2008. In the reporting period The Phoenix recorded an expense of NIS 13.2 million following impairment of intangible assets attributed to the long-term savings segment of Excellence – see also Note 4 to the financial statements. Premiums earned in 2009 amounted to approximately NIS 2,646.7 million, compared with NIS 2,637.9 million in 2008, an increase of 0.3%. The moderate increase was affected by the rise in the cancellation rate and a decline in new sales, as noted above. Redemptions in the reporting period amounted to approximately NIS 648.9 million, compared with NIS 642.8 million in 2008. The rate of redemptions to average life assurance reserves, gross, at December 31, 2009 and December 31, 2008 (in annual terms) is approximately 2.8% and 2.9% respectively. Due to the negative yield in 2008 from profit-sharing policies, The Phoenix did not collect variable management fees, nor will it be able to do so until attainment of a positive yield sufficient to cover the accumulated negative real yield. Management fees not collected until the negative yield and becomes positive, are estimated at December 31, 2009 at NIS 299 million, and at February 28, 2010 at NIS 169.8 million (on December 31, 2008 – NIS 627.3 million). The decrease in the deficit stemmed from positive yields in 2009. Pension and provident funds At the reporting date, the assets of The Phoenix Pension and Compensation Fund Management Ltd. ("The Phoenix Pension") amounted to NIS 3,190 million, compared with assets of NIS 2,096 million on December 31, 2008. Profit before tax at The Phoenix Pension in the reporting period was NIS 1.1 million, compared with NIS 4.3 million in 2008. At the reporting date, the assets of The Phoenix Provident Ltd. ("The Phoenix Provident") amounted to NIS 921 million, compared with assets of NIS 627 million on December 31, 2008. The Phoenix Provident posted a pre-tax loss of NIS 0.4 million in 2008. The results of the life assurance and long-term savings segment also included the long-term savings data of Excellence (mainly provident fund management) which were consolidated for the first time in the reporting period and amounted to NIS 48.8 million before tax see also Section B above). Total long-term savings assets of Excellence at December 31, 2009 amounted to NIS 17.7 billion. General insurance Revenue from premiums earned in 2009 amounted to approximately NIS 1,754.6 million, compared with NIS 1,649.6 million in 2008, an increase of about 6.4%. In the fourth quarter of the year, revenue from premiums earned amounted to NIS 449.1 million, compared with NIS 418.5 million in the corresponding period in 2008, an increase of about 7.3%.

B-17 Directors’ Report Delek Group Ltd.

Profit from the general insurance segment in 2009 amounted to approximately NIS 118 million compared with a loss of NIS 303.4 million in 2008 and a profit of NIS 134.6 million in 2007. In the fourth quarter of the year, profit amounted to NIS 21.4 million, compared with a loss of NIS 280.5 million in the corresponding period in 2008.The improvement in profit stemmed mainly from real improvement in investment income. Health insurance Revenue from premiums earned in the health insurance segment in 2009 amounted to NIS 1,020.4 million, compared with NIS 866.6 million in 2008, an increase of about 17.7%. In the fourth quarter of the year, revenue amounted to NIS 270.3 million, compared with NIS 237 million in the corresponding period, an increase of about 14.1%. Most of the increase is attributable to a contract signed at the end of the prior year relating to relocation health insurance, and to an increase in the collective business. Profit in 2009 amounted to approximately NIS 162.7 million, compared with NIS 80.4 million in 2008, an increase of about 102.4%. Profit in 2007 was NIS 122.4 million. In the fourth quarter of 2009, profit was NIS 45.2 million, compared with NIS 14.6 million in the corresponding period. The increase in profit stems mainly from improved profitability in personal and collective nursing and health insurances and from increased investment revenue. Financial services segment Activity in this segment is through Excellence, whose results were consolidated in the financial statements of The Phoenix commencing from the reporting period – see Note 14H to the financial statements.. In 2009, financial services posted a profit of NIS 13.1 million, and in the fourth quarter of the year a profit of NIS 8 million. The profit is after an expense of NIS 45.7 million recorded by The Phoenix following impairment of intangible assets of Excellence. According to the financial statements of Excellence, total assets under management by Excellence at December 31, 2009 amount to NIS 55 billion, compared with NIS 32.2 billion on December 31, 2008, an increase of 70.8%. During the period, the Prizma transaction was closed, in which assets of approximately NIS 9.7 billion were transferred to the management of the Excellence group. (The assets under management at December 31, 2009 include NIS 17.7 billion whose results were included under life assurance and long-term savings.) In the reporting period, a trend has been apparent of an increase in assets under management in most of the areas of operation of the Excellence group. The transition to positive yield and the recovery in the capital market that characterized 2009, enabled Excellence to grow or to maintain the status quo in all its areas of operation (including by the acquisition of trust fund operations and Prizma basket certificates). Assets under the Excellence Group's management are influenced, among other things, by the market situation and by exchange rates to which some of the series issued by the dedicated companies are linked.

B-18 Directors’ Report Delek Group Ltd.

2) Republic Companies, Inc. Republic Companies, Inc. ("Republic") is a holdings company that holds insurance companies and agencies involved mainly in property insurance and other general insurance, particularly in Texas, Louisiana, Oklahoma, Mississippi, Arkansas and New Mexico in the U.S. The results of operations of Republic as included in the results of the Group:

1-3/2009 4-6/2009 7-9/2009 10-12/2009 2009 2008 $ millions $ millions $ millions $ millions $ millions $ millions Premiums earned (retention) 97 93 90 84 364 375 Investment and other income, net 11 18 16 10 55 25 Total income 108 111 106 94 419 400 Increase in insurance liabilities less reinsurers 61 74 80 53 268 289 Commissions and other acquisition expenses 29 26 22 26 103 111 General and administrative expenses 8 9 9 7 33 36 Amortization of goodwill - - - - - 4 Expenses (income) in respect of employee benefits - - - (4) (4) 20 Financing expenses 2 2 2 1 7 9 Total expenses 100 111 113 83 407 469 Profit (loss) before tax 8 - (7) 11 12 (69) Net profit (loss) 6 - (4) 7 9 (44)

Analysis of the results of Republic's operations Income from premiums (gross) in 2009 amounted to USD 911 million, compared with USD 830 million in 2008, an increase of about 10%. Income from premiums (gross) in the fourth quarter of 2009 amounted to USD 215 million, compared with USD 206 in fourth quarter of 2008, an increase of about 4%. The increase in income from premiums stems from growth in all areas of Republic's operation, which includes an increase in premiums in private and commercial insurances and continued growth in the insurance services sector (provision of insurance services for other insurance companies). Insurance fees earned (in retention) in 2009 amounted to USD 364 million, compared with USD 375 million in 2008. Insurance fees earned (in retention) in the fourth quarter of 2009 amounted to USD 84 million compared with USD 95 million in the corresponding period in 2008. The decrease is attributed to a rise in premiums and an increase in expenses in respect of disaster reinsurance. The equity of Republic as included in the financial statements of the Group at December 31, 2009 is USD 309 million (December 31, 2008 – USD 300 million), and profit for 2009 as included in the financial statements is USD 9 million. Republic recently distributed a dividend on USD 4 million. Additional information For more information about insurance and financial operations, see Note 14H to the financial statements and Sections 1.12 and 1.13 of Chapter A in the Periodic Report – Description of the Corporation's Business.

B-19 Directors’ Report Delek Group Ltd.

G. Additional Activities 1) Real Estate On March 31, 2009, after obtaining the requisite approvals, the Board of Directors of the Company resolved to distribute most of the shares it held of Delek Real Estate, as a dividend to the Company's shareholders. The X date was set for April 20, 2009, and the date of actual distribution was May 3, 2009. After the distribution, the Group holds 5% of the issued and paid up capital of Delek Real Estate. The investment is stated by the equity method. As a result of distribution of the dividend in kind as described above, the Company ceased consolidation of the operations of Delek Real Estate in the financial statements. This is reflected in a decrease of total assets in the consolidated balance sheet by approximately NIS 23 billion (mainly in respect of investment real estate and assets held for sale), and of liabilities by approximately NIS 22 billion (mainly in respect of short-term and long-term bank loans and debentures issued by Delek Real Estate). The results of Delek Real Estate's operations were stated separately in the income statement, under Profit (loss) from discontinued operations, and comparison figures were reclassified. Se also Note 14G to the financial statements. In connection with a joint investment of the Company (25%) and Delek Real Estate (75%) in Road Chef – see Note 14M to the financial statements and Section 1.4 in Chapter A of the Periodic Report – Description of the Corporation's Business. 2) Infrastructures The Company operates in infrastructures through Delek Infrastructures Ltd., which holds 50% of IDE Technologies Ltd. (“IDE”) and coordinates the development and operation of power stations in Israel and Brazil through subsidiaries. The contribution of the infrastructures sector to the net profit of the Group in 2009 was NIS 135 million, mainly stemming from the profits of IDE. In July 2009, a subsidiary of Delek Infrastructures signed an agreement with Tnuva Central Cooperative for the Marketing of Agricultural Produce in Israel Ltd. (“Tnuva”), for the design, financing, licensing, erection, operation and maintenance of a cogeneration (electricity and steam) with an output of 55 megawatt and operated on natural gas, in Tnuva's Alon Tavor compound. The term of the agreement is 27 years, commencing from the date of completion of the arrangements for financing construction of the power station. During the term of the agreement, the land on which the station will be built, will be sub-leased to the subsidiary. The agreement in contingent upon the financial arrangements being completed by April 30, 2011 and erection of the power station by October 31, 2012, subject to terms stipulated in the agreement concerning postponement of those dates. In December 2009, a subsidiary (51%) of IDE won a BOT tender for the erection of a seawater desalination plant on Sorek. The Sorek facility is designed to be the largest in Israel, with a production capacity of 150 million cubic meters of desalinated water. The IDE subsidiary entered into an agreement with Delek Infrastructures whereby Delek Infrastructures will supply, through a project company that it will establish for the purpose, all the electricity needs of the desalination plant. The provisions of the tender allow Delek Infrastructures to erect a power station in the area designated for the desalination plant, subject to receipt of the statutory approvals. IDE recently announced the distribution of a dividend of NIS 40 million to its shareholders, in which the Company's share is NOS 20 million. For more information about IDE, see Note 14B to the financial statements In January 2010, Delek Infrastructures entered into an agreement with private entrepreneurs for the erection of a natural-gas-operated power station with an output of 240 megawatts, in the Kiryat Gat industrial zone. Completion of the engagement between the parties is contingent upon the fulfillment of preconditions, and there is no certainty that the transaction will be closed. 3) Biochemicals Gadot, a manufacturer of food supplements and chemicals for the food, health supplements, detergents and toiletries industries, is a public company in which the Group holds 64.11% at the balance sheet date. Gadot manufactures crystalline fructose, citric acid, citric acid salts, phosphoric acid salts, and specialty citric-acid-based salts. Most of Gadot's sales are in European and North American

B-20 Directors’ Report Delek Group Ltd.

markets, and among its customers are some of the world's leading multinational companies in the food and detergent industries. The contribution of the biochemicals segment to the Group's profits in 2009 amounted to a profit of NIS 17 million, compared with a loss of NIS 9 million in 2008. 4) Communications HOT Cable Communications Systems Ltd. (“HOT”), is a public company. In December 2009 the Group sold 12% of HOT's shares, after which the Group retains a 4% holding in the share capital of HOT. At December 31, 2009, the investment in HOT is stated as a financial asset available for sale and at a fair value of NIS 119 million. The contribution of communications operations to the net profit of the Group in 2009 amounted to a profit of NIS 3 million, compared with NIS 5 million in 2008. For more information about additional operations, see Section 1.14 in Chapter A of the Periodic Report – Description of the Corporation's Business.

H. Balances of goodwill and intangible assets Goodwill balances (in NIS millions): Balance at December 31, Impairment Company Description 2009 recorded in 2009 Delek Israel Mainly goodwill in respect of the purchase of Pi Glilot 318 - Delek US Goodwill in respect of various acquisitions of gas stations 227 27 Delek Benelux Goodwill in respect of purchase of the fuel operation in Benelux 633 - Delek Finance Goodwill in respect of acquisition of Republic 455 - Delek Investments and Goodwill in respect of acquisition of The Phoenix Delek Capital 315 - The Phoenix Mainly goodwill in respect of Excellence and Prizma 1,207 10 Others 91 - Total 3,242 37

Other intangible asset balances (in NIS millions):

Balance at Impairment Company Description December 31, recorded in 2009 2009 Delek Benelux Marketing rights, brands and franchises 574 - The Phoenix Mainly in respect of customer portfolios and on- competition agreements 219 16 Republic Mainly in respect of customer portfolios 100 - The Phoenix Computer software 454 - Delek Investments and Mainly surplus cost attributed to the value of Delek Capital insurance portfolios in respect of acquisition of The Phoenix 314 - Others Others 89 - Total 1,750 16

Review of the materiality of valuations to attachment / disclosure The Company reviews the materiality of valuations for providing disclosure or attachment by a test of 10% and 20%, respectively, out of total assets or the representative annual profit (based on the average profit of the past 12 quarters).

B-21 Directors’ Report Delek Group Ltd.

B. Market Risk Exposure and Management

1. a) The activities of the Company focus mainly on holdings and managing shares of its subsidiaries. The investments are long term, and therefore the holdings are not hedged.

Risk management in the subsidiaries and associates is determined and carried out directly by those companies. Some of the companies are public and trade on the stock exchange, and therefore proper disclosure is made on this subject in their financial statements. b) The market risk management officer for currency in the Company and in some of the associates is Mr. Ido Adar, MBA. For the past four years, Mr. Adar has served as Treasurer of the Company, prior to which he served as head of the Treasury and Insurance department at Delek Israel.

2. Description of market risks

a) As stated above, the Group is mainly a holdings and management company and its principal exposure results from the market risks of its subsidiaries and affiliates (“Investees”). The principal risks in these companies are these: - Changes in exchange rates The Group and the Investees have loans denominated in foreign currency, exposing the Group to changes in foreign currency exchange rates. Moreover, exchange rates can have an effect on the Company’s business results. - Changes in interest rates The Group and the Investees have shekel loans at variable interest rates and they are consequently exposed to changes in the interest rates applied by Israeli banks. Some of the Group companies have taken out loans abroad, on which variable interest rates are those applied by overseas banks, which expose them to interest rate changes in those countries. - Exposure to rises in the CPI A considerable number of the Group’s and Investees’ long-term loans are in CPI-linked shekels. The Group’s management believes that in many cases, the Group’s exposure to a rise in the Israeli CPI is a limited economic exposure, since it believes that the value of the Group’s property, plant and equipment rises over time at least at the same rate of rise as the CPI. It is noted that some of the Group companies hedge against a rise in the CPI above a certain annual level. - Economic slowdown and changes in the markets in which the Group operates The Group has substantial operations in various countries around the world. Changes in those markets, especially economic slowdowns (including in Israel) can have adverse effects on the operations of the Group and the Investees. - Capital market situation Changes in prices of negotiable securities held by the Group expose it to risks stemming, inter alia, from volatility in the capital market. A slump in capital markets in Israel and worldwide could adversely effect the Group’s ability to find sources of financing where necessary, as well as its ability to generate capital gains from realization of its investments. Likewise, a slump in capital markets could impede the ability of the Group and the Investees to raise capital, and lead to a possible fall in the prices of the Investees’ securities after being issued on stock exchanges. b) The Group is exposed to changes in the prices of raw materials, other prices and other economic indices that can materially affect the Group’s assets and liabilities, including trade payable liabilities, customer debts to Group companies, the value of its and other assets and liabilities.

B-22 Directors’ Report Delek Group Ltd.

3. Market risk management policy

− Overseas Investees customarily finance their investments in each country in the investment currency of that country. The income of Investees from income-generating assets which are intended to finance principal and interest payments, are in the local currency, as are all of their other assets, and therefore, the Investees are not economically exposed to changes in foreign currency exchange rates. − In order to neutralize interest risks in respect of loans taken by the Investees for the purchase of their assets, the companies have seta policy whereby most of the loans that they raise outside of Israel are chiefly long-term fixed-interest loans. − The Company and the Investees customarily use, from time to time, currency options and other derivatives. These transactions are made with large financial corporations in Israel and overseas, for hedging and other purposes.

4. Supervision and implementation of market risk management policy

− The Investees manage their market risks under the supervision of their boards of directors or through special board committees. The Group also receives assistance from external advisers with expertise in these markets. − The internal control mechanisms of the Group and the Investees also monitor market risk management issues. − The Group’s companies are required to provide full reports on the volume and type of their exposures, and the hedging methods that they employ or do not employ in connection with those exposures .

5. Linkage bases report at December 31, 2009 and 2008

On linkage base reports, see Note 29D to the financial statements.

B-23 Directors’ Report Delek Group Ltd.

6. Sensitivity tests in respect of changes in market factors

In accordance with the 2007 amendment to the provisions of the Second Addendum to the Securities (Periodic and Immediate Reports) Regulations, 5730-1970, the Group tested sensitivity to changes in risk factors that influence the fair value of “sensitive instruments”. Sensitivity to foreign currency risks was tested for positions exposed to changes in the exchange rate of various currencies against the functional currency of the Group companies. For example, for foreign currency positions in companies whose functional currency is the euro, the tests were for sensitive instruments that are exposed to other foreign currency exchange rates against the euro. Balance sheet items such as debentures and CPI-linked loans were not included in the table of sensitivity to changes in the CPI, since their fair value is exposed to unforeseen changes in inflation expectation, which is reflected in changes in the shekel-linked graph. 1) Sensitivity of financial instruments in the general course of business Parameters, assumptions and models: a. The fair value marketable securities is their market value. b. The fair value of loans and debentures was calculated by discounting future cash flows at an interest rate that reflects the financing costs of the Group and of the subsidiaries at the reporting date. c. The fair value of options and changes in the fair value according to the sensitivity tests was calculated using a Black & Scholes model, spot prices, standard deviations and interest rates as shown in the tables below. d. The fair value of futures contracts and changes in the fair value according to the sensitivity tests was calculated by discounting each of the two ""legs" of the transaction, using spot rates and interest rates as shown in the tables below. e. Sensitivity tests for changes in interest on fixed-interest loans and debentures were carried out according to duration. f. Loans and debentures at variable interest were not included in interest rate sensitivity tests, since the effect of changes in the interest rates on their fair value is negligible. g. Parameters:

Parameter Source / Manner of treatment NIS/Foreign currency exchange rates Representative rates Foreign currency/Foreign currency exchange rates Calculated from representative rates Interest rates By risk-free interest rate graph Standard deviations ATM

h. Daily changes exceeding 10% in the relevant risk factors.

Risk factor Maximum change Date Remarks Interest rates 20% Assumption Or two percentage points (200 base points), whichever is the higher Share prices 20% Assumption Share prices 15% Assumption Oil/fuel/gas prices 25% Assumption Foreign currency / commodities 50% Assumption standard deviation

B-24 Directors’ Report Delek Group Ltd.

i. Derivative instruments in the Group companies are for hedging and are not recognized for accounting unless stated otherwise. 2) Summary table (in NIS thousands) Sensitive instrument Profit (loss) from changes Fair value Profit (loss) from changes (*) 10% 5% -5% -10% (*) USD/NIS (39) (19) (1,293) 19 37 EUR/NIS (32) (16) (331) 15 31 GBP/NIS 3 1 26 (1) (3) JPY/NIS (99) (49) (1,011) 48 95 Other/NIS 1 1 13 (1) (1) Other/Other 3 2 (108) (1) (1) NIS/CPI 1 0 (3) (0) (1) Nominal shekel interest 115 38 19 (1,154) (19) (38) (116) Real shekel interest 662 329 165 (7,045) (165) (330) (669) Dollar interest (77) (13) (7) 844 7 13 83 Euro interest 83 6 3 (115) (3) (6) (83) Other interest rates 1 0 0 (24) (0) (0) (1) Sugar price 9 6 3 9 (3) (6) (9) Oil price 17 8 4 124 (4) (7) (11) Gas price (4) (2) (1) (22) 1 3 5 Foreign currency standard deviation (2) (0) (0) (0) 0 0 1 Commodities standard deviation 6 1 1 9 (1) (1) (6) Shares 186 93 46 926 (46) (93) (186) * See sub-section h. above.

A. Sensitivity tests for changes in the CPI (in NIS millions)

Profit (loss) from Profit (loss) from changes Fair changes value Sensitive instrument 0.2% 0.1% -0.1% -0.2% Futures contracts 1 0 (3) (0) (1)

B-25 Directors’ Report Delek Group Ltd.

B. Sensitivity tests for changes in NIS/foreign currency exchange rates (in NIS millions) Sensitivity tests for changes in the NIS/USD exchange rate

Profit (loss) from Profit (loss) from changes Fair changes value 10% 5% -5% -10% Sensitive instrument 4.153 3.964 3.775 3.586 3.398 Cash 14 7 148 (7) (14) Trade receivables, accounts receivable and debit balances 9 5 102 (5) (9) Marketable securities 8 4 83 (4) (8) Financial asset available for sale 9 5 93 (5) (9) Long-term deposits and debit balances 24 12 237 (12) (24) Trade payables, accounts payable and credit balances (37) (19) (461) 19 37 Bank credit (126) (63) (1,309) 63 126 Debentures 2 1 (218) (1) (2) Other assets 1 0 8 (0) (1) Investment in associate 3 2 34 (2) (3) NIS/USD futures contracts 56 28 (11) (28) (56) Vanilla options (1) (0) (2) (0) (1) Exotic options (2) (1) 2 1 3 Total (39) (19) (1,293) 19 37

Sensitivity tests for changes in the EUR/NIS exchange rate

Profit (loss) from Profit (loss) from changes Fair changes value 10% 5% -5% -10% Sensitive instrument 5.9859 5.7138 5.4417 5.1696 4.8975 Trade payables, accounts payable and credit balances (1) (1) (11) 1 1 Bank credit (30) (15) (296) 15 30 Liability in respect of an issuance of blocked shares (2) (1) (21) 1 2 Options 1 1 0 (1) (2) Total (32) (16) (331) 15 31

Sensitivity tests for changes in the GBP/NIS exchange rate

Profit (loss) from Profit (loss) from changes Fair changes value 10% 5% -5% -10% Sensitive instrument 6.7223 6.4168 6.1112 5.8056 5.5001 Investment in associate 3 1 27 (1) (3) Accounts payable and credit balances (0) (0) (1) 0 0 Total 3 1 26 (1) (3)

B-26 Directors’ Report Delek Group Ltd.

Sensitivity tests for changes in the JPY/NIS exchange rate

Profit (loss) from Profit (loss) from Fair changes changes value 10% 5% -5% -10% Sensitive instrument 0.0450 0.0429 0.04086 0.0388 0.0368 Bank credit (5) (3) (52) 3 5 Trade payables (95) (47) (946) 47 95 Liability in respect of an issuance of blocked shares (1) (1) 912) 1 1 Futures contracts 1 1 0 (1) (1) Options 1 1 (1) (2) (5) Total (99) (49) (1,011) 48 95

Sensitivity tests for changes in other foreign currency/NIS exchange rate

Profit (loss) from Profit (loss) from Fair changes changes value Sensitive instrument 10% 5% -5% -10% Securities available for sale 1 1 13 (1) (1)

C. Sensitivity tests for changes in the foreign currency/foreign currency exchange rate

Profit (loss) from Profit (loss) from changes Fair changes value Sensitive instrument 10% 5% -5% -10% Short-term investments 0 0 5 (0) (0) Bank credit (2) (1) (19) 1 2 Trade payables, accounts payable and credit balances 9 5 (95) (5) (9) Foreign currency/foreign currency futures contracts (6) (3) (0) 3 6 Vanilla options 3 1 1 (1) (1) Exotic options (1) (0) 0 1 2 Total 3 2 (108) (1) (1)

D. Sensitivity tests for changes in interest rates (in NIS millions) Sensitivity tests for changes in nominal shekel interest

Profit (loss) from Profit (loss) from changes Fair changes Sensitive instrument (*) 10% 5% value -5% -10% (*) Bank credit 1 0 0 (49) (0) (0) (1) Government bonds (6) (1) (1) 92 1 1 6 Debentures 110 38 19 (1,179) (19) (38) (110) CPI futures contracts 5 0 0 (3) (0) (0) (5) NIS/foreign currency futures contracts 2 0 0 (11) (0) (0) (3) NIS/foreign currency options (0) (0) (0) (1) 0 0 0 Interest derivatives 3 0 0 (1) (0) (0) (3) Total 115 38 19 (1,154) (19) (38) (116) *See sub-section h. above

B-27 Directors’ Report Delek Group Ltd.

Sensitivity tests for changes in real shekel interest

Profit (loss) from Profit (loss) from changes Fair changes value Sensitive instrument (*) 10% 5% -5% -10% (*) Long-term loans to customers (5) (2) (1) 71 1 2 5 Government bonds (9) (1) (0) 91 0 1 9 Corporate debentures (10) (3) (1) 78 1 3 10 Loans to associates (5) (1) (1) 49 1 1 6 Loans to managers (1) (0) (0) 14 0 0 1 Bank credit 34 9 4 (471) (4) (9) (43) Straight bonds 519 135 67 (6,874) (67) (135) (521) CPI futures contracts (5) (0) (0) (3) 0 0 5 Total 519 137 68 (7,045) (68) (137) (528) * See sub-section h. above.

Sensitivity tests for changes in dollar interest

Profit (loss) from Profit (loss) from changes Fair changes value Sensitive instrument (*) 10% 5% -5% -10% (*) Loans to customers (0) (0) (0) 4 0 0 0 Corporate debentures (0) (0) (0) 3 0 0 0 Debentures (74) (15) (7) 999 7 15 79 Mortgage-backed debentures (8) (2) (1) 140 1 2 9 Other assets (1) (0) (0) 8 0 0 1 Debentures 6 3 1 (222) (1) (3) (6) Republic's credit 3 1 0 (53) (0) (1) (3) Foreign currency derivatives (3) (0) (0) (10) 0 0 3 Derivatives on commodities 0 0 0 (24) (0) (0) (0) Total (77) (13) (7) 844 7 13 83 * See sub-section h. above

Sensitivity tests for changes in euro interest

Profit (loss) from Profit (loss) from changes Fair changes ןvalue Sensitive instrument (*) 10% 5% -5% -10% (*) Foreign currency derivatives (0) (0) (0) 1 0 0 0 IRS transactions for hedging purposes(**) 83 6 3 (115) (3) (6) (83) Interest derivatives 0 0 (0) (1) 0 (0) (0) Total 83 6 3 (115) (3) (6) (83) * See sub-section h. above. ** 50% effective hedging.

B-28 Directors’ Report Delek Group Ltd.

Sensitivity tests for changes in other currency interest

Profit (loss) from Profit (loss) from changes Fair changes value Sensitive instrument (*) 10% 5% -5% -10% (*) Foreign currency derivatives 0 0 (0) (1) 0 (0) (0) Bank credit 1 0 0 (23) (0) (0) (1) Total 1 0 0 (24) (0) (0) (1) * See sub-section h. above.

E. Sensitivity tests for changes in the prices of commodities (in NIS millions) Sensitivity tests for changes in sugar prices

Profit (loss) from change Fair Profit (loss) from change Sensitive instrument 15% 10% 5% value -5% -10% -15% Sugar futures contracts 9 6 3 9 (3) (6) (9)

Sensitivity tests for changes in oil prices

Profit (loss) from change Fair Profit (loss) from change Sensitive instrument 20% 10% 5% value -5% -10% -20% Fuel inventories 27 14 7 137 (7) (14) (27) Options on oil (4) (3) (1) 8 2 4 10 Oil futures contracts (6) (3) (1) (20) 1 3 6 Total 17 8 4 124 (4) (7) (11)

Sensitivity tests for changes in gas prices

Profit (loss) from change Fair Profit (loss) from change Sensitive instrument 20% 10% 5% value -5% -10% -20% Options on gas (1) (0) (0) 1 0 1 1 Gas futures contracts (4) (2) (1) (23) 1 2 4 Total (5) (2) (1) (22) 1 3 5

Sensitivity tests for changes in standard deviation of foreign currency (NIS millions)

Profit (loss) from change Fair Profit (loss) from change Sensitive instrument 50% 10% 5% value -5% -10% -50% NIS/foreign currency options (2) (0) (0) (1) 0 0 1 Foreign currency/ foreign currency options 0 0 0 1 (0) (0) (0) Total (2) (0) (0) (0) 0 0 1

Sensitivity tests for changes in standard deviation of commodities (NIS millions)

Profit (loss) from change Fair Profit (loss) from change Sensitive instrument 50% 10% 5% value -5% -10% -50% Options on oil 6 1 1 8 (1) (1) (5) Options on gas 0 0 0 1 (0) (0) (0) Total 6 1 1 9 (1) (1) (6)

Sensitivity tests for changes in share prices (NIS millions)

Profit (loss) from change Fair Profit (loss) from change Sensitive instrument 20% 10% 5% value -5% -10% -20% Shares 186 93 46 926 (46) (93) (186)

B-29 Directors’ Report Delek Group Ltd.

C. Aspects of corporate governance

1. Philanthropy The Company’s policy is carried out primarily through the Delek Science, Education and Culture Foundation Ltd. ("Delek Foundation”) which acts as the executive arm for the community activities of the companies in the Group. Delek Foundation’s policy is to award scholarships to students at academic institutions and at secondary education institutions, and to make donations in the fields of education, culture, medicine and help for the needy. The principal sources of Delek Foundation’s income are donations by companies in the Delek Group. In 2009 the Delek Foundation donated approximately NIS 4.287 million. Of this amount some NIS 3.256 million was donated in the form of scholarships to students at educational institutions throughout the country, and some NIS 1.537 million was donated for various purposes, primarily in the fields of health, education, culture and help for the needy. The Company’s Board of Directors has decided to set up, as part of the Delek Foundation, a dedicated fund of NIS 18 million to assist in the awarding of scholarships to soldiers in combat units. The scholarships are awarded to soldiers who are in Israel without their families, or who live in outlying areas or who are socio-economically underprivileged. The intention is to award those who meet the criteria a scholarship of NIS 10,000 per year to cover the study period (3-4 years). In 2009 scholarships were awarded to another 300 newly-released soldiers, in a total amount of NIS 3 million. In 2010 the Foundation intends to award scholarships to another 100 soldiers, so that in all, the Foundation will have awarded 400 scholarships, in a total amount of NIS 4 million. Each recipient of a scholarship will be obliged to engage in some form of voluntary activity on behalf of the community.

2. Directors with accounting and financial expertise The Company has determined that there shall be a minimum of two directors who have accounting and financial expertise. The Company believes that since the board of directors of the holding company is small (seven directors), and since the directors have rich business experience (even those who do not meet the definition of “accounting and financial experts”), this minimum number enables the board of directors to fulfill the duties imposed upon it by law and the Company’s documents of incorporation in all matters pertaining to examination of the Company’s financial position and the drafting and approval of its financial statements. In addition to the above, it should be added that under the Company’s work procedures, the Company’s auditor is invited to every board meeting at which the financial statements are discussed, and he is available to the directors to provide any explanation that may be required in connection with the financial statements, either at the meetings in which he participates, or outside the framework of these meetings. It should also be noted that, by law, every director who so desires is entitled, under circumstances justifying this and under the conditions stipulated in law, to receive professional advice at the Company’s expense, in order to carry out his duties, including accounting and financial advice. The directors with accounting and financial expertise are: a) Mr. Moshe Amit – B.A. Soc. Sc.. Senior employee for more than 40 years at Bank Hapoalim: Deputy CEO and member of the bank’s management (from 1980), joint CEO (1990), followed by acting CEO (2000-2003). He is also a director of Bank Hapoalim (Switzerland) and is a member of other boards of directors. b) Prof. Benzion Zilberfarb (external director) – Ph.D (Econ) from Pennsylvania University, Philadelphia, USA and M.A. (Econ) from Bar-Ilan University. B.A. Economics and Business Administration – Bar-Ilan University. Previously served (1998-1999) as Director-General of the Ministry of Finance. Currently serves as Head of the Banking and Capital Market Program and Head of the Global Assets Management Department at Netanya College. Also serves as the Head of the A. Mayer Banking Center at Bar-Ilan University.

B-30 Directors’ Report Delek Group Ltd.

In the past, served, inter alia, as Dean of the Social Sciences Faculty at Bar-Ilan University (1993- 1997) and as Head of the Economics Department at Bar-Ilan University (1992-1993), Director of the Azrieli Center for Research into the Israeli Economy (1991-1996), Head of the Economic Research Institute (1987-1988) and head of A. Meir Banking Center (2000-2001) at Bar-Ilan University. Also served – and currently serving – on the boards of directors of various large economic entities, including: Israel Discount Bank, Brimag Digital Age, Fundtech, Clal Provident and Continuing Education Funds, Partner, EuroTrade Bank, Karnit Insurance Company, and others. c) Mr. Avraham Harel – M.A. (Econ), Tel Aviv University (1977) and B.A. (Econ & Statistics), Tel Aviv University (1973). Previously served as a lecturer in the Tel Aviv University Economics Department (1973-1984). Served in the past as Deputy CEO, management member and Director of the Financial Division and Information Division at Bank Hapoalim. Also served (and in some cases continues to serve) as a board member of various business companies, including: Poalim Capital Markets Ltd. (Chairman), Bank Otsar Hachayal (Chairman), Tel Aviv Stock Exchange, Maalot The Israeli Securities Rating Company Ltd., Continental Mutual Funds Ltd., Hapoalim International (Chairman), Bank Hapoalim (Switzerland), Bank Hapoalim (Luxembourg), Koor, Granit Hacarmel; The Phoenix Holdings Ltd., and The Phoenix Assurance Co. Ltd. . d) Mr Yossef Dauber – B.A. (Econ & Statistics), Tel Aviv University, and M.A. in Law , Bar Ilan University. Between 2003 and 2008 Mr. Dauber served as director of Bank Hapoalim Ltd. and in 2000-2002 was joint CEO and deputy chairman of management at Bank Hapoalim Ltd. Currently serves as director of the following companies: Nice Systems Ltd., Lodzia Rotex Investments Ltd. (external director), VocalTec Technologies Ltd., Micro Disk Ltd. and Orbit Wireless Ltd.

3. Independent directors Section 219E of the Companies Law, 5769-1999 ("the Companies Law”), as amended in its Amendment 8, came into force on September 28, 2008, and determines that public companies may stipulate in their articles a provision concerning the number of independent directors who will serve in the company and it may determine their percentage out of the number of serving directors. The proportion of independent directors as defined in the Companies Law, in a public company which has a controlling shareholder, is at least one third of the board members. There are currently three independent directors serving on the Board of Directors, accounting for more than one third of all the directors, and therefore the board of directors has decided that at this stage there is no need to amend the Company’s articles. If circumstances change in the future, the Board will review the matter.

4. Disclosure concerning the Company's internal auditor A. Details of Internal Auditor 1) Name of auditor: Michael Greenberg 2) Date of commencement of office: 2002 3) Qualifications: BA in accounting and economics and is a Certified Public Accountant, is a member of the Israeli Institute of Internal Auditors, and has considerable experience in the field of auditing (20 years in a variety of different internal audit functions). 4) To the best of the Company’s knowledge, the internal auditor is in compliance with the provisions of section 146(b) of the Companies Law 5759-1999 and with the provisions of section 8 of the Internal Audit Law. 5) The internal auditor is an employee of a wholly-owned subsidiary of the Delek Group, Delek Investments and Assets Ltd., and is a full-time employee.. 6) The internal auditor does not hold securities in the Company or in any entities related to it. 7) The internal auditor is not an interested party in the corporation nor is he a relative of an interested party in the corporation, nor is he the auditing accountant or a person acting on his behalf.

B-31 Directors’ Report Delek Group Ltd.

8) The internal auditor does not perform any other function in the corporation other than that of internal auditor. The internal auditor does not perform any function outside of the corporation which gives rise or which might give rise to a conflict of interests with his function as internal auditor. B. Method of Appointment The appointment of the internal auditor was approved by the Audit Committee and the Board of Directors in 2002. The reasons for approving his appointment include his education, skills and considerable experience in internal auditing. C. Auditor’s Superior The internal auditor reports directly to the CEO of the Delek Group, as determined by the Company’s Articles of Association. D. Work Plan The work plan of the corporation’s internal audit is annual. The main considerations used to determine the Company’s annual audit plan are as follows: 1) Internal auditor’s suggestions for the annual work plan. 2) Proposals from members of the Audit Committee and the Company’s Board of Directors based, inter alia, on the internal auditor’s suggestions, subjects of internal audits in previous years and subjects discussed at regular meetings of the Audit Committee and Company’s Board of Directors. 3) Size and organizational structure of the Company, the substance and scope of its commercial operations. The plan is drafted by the corporation’s internal auditor, and is approved by the Company’s Audit Committee. Management, the Audit Committee and the chairman of the Board of Directors can extend the scope of the plan, or order specific changes, upon a request or recommendation from the internal auditor or upon instructions from the committee. E. Audit of investees The internal audit work plan includes audit matters that relate to the reporting corporation. In some of the Corporation’s substantial investee corporations, separate annual audit plans are drafted by the internal auditor who also acts as internal auditor of these corporations. The other substantial investee corporations of the Corporation have internal auditors who do not report to the Internal Auditor, and they draft the internal work plans for those corporations. The internal audit plans in investee corporations are approved by the board of directors and the audit committees of the above corporations. F. Scope of employment The internal auditor of the Company is a full-time employee and serves as internal auditor of the Company and of some of the corporations that constitute material holdings of the Company, which are Delek Automotive Systems, Delek Energy Systems, Delek Drilling, and Avner Oil and Gas In 2009, the annual number of hours of the internal auditor and other internal auditors employed on an outsourcing basis in the Company and in some of the Group's companies, in Israel and overseas, amounted to 41,900 hours. This includes the operations in Israel of four investee corporations which are audited by internal auditors who do not report to the Company’s internal auditor, which account for 27,000 annual hours as set out below: The Phoenix 23,800 annual work hours Delek Israel 2,700 annual work hours Gadot Biochemicals 450 annual work hours IDE Technologies: 100 annual work hours

B-32 Directors’ Report Delek Group Ltd.

In addition, the overseas operations of three investees are audited by internal auditors who do not report to the internal auditor, accounting for 12,630 annual hours, as set forth below: Delek USA 9,450 annual work hours Republic 1,670 annual work hours Delek Benelux 1,530 annual work hours G. The audit According to notification from the internal auditor, the audits are carried out in accordance with the internal auditing standards employed in Israel and around the world, and in accordance with internal audit professional guidelines, including the standards of the Institute of Internal Auditors in Israel and in the USA (CIA), and in accordance with the Internal Audit Law, 5752-1992, and the Companies Law. H. Access to Information The internal auditor has full, unrestricted, constant and unfettered access to all of the Company’s information systems, including financial data. I. Internal Audit Report The internal auditor’s report is submitted in writing. Audit reports were submitted and discussed by the Board of Directors of the Company on the following dates: Summary report for 2009: Submitted January 2010 and discussed March 2010. The report was submitted to the Chairman of the Board, to the CEO of the Company and to members of the Company’s audit committee. J. Board of Directors assessment of internal auditor’s work In the assessment of the Company’s Board of Directors and Audit Committee, the scope, nature and continuity of the operations and work plan of the Company’s internal auditor are reasonable, given the scope, organizational structure, substance and scope of its business operations, and will serve to achieve the purposes of the corporation’s internal audit. K. Remuneration The internal auditor is a full-time salaried employee of a wholly-owned subsidiary of the Delek Group. The subsidiary charges the Delek Group the total sum of NIS 150,000 for annual internal audit services. In the opinion of the Board of Directors, the internal auditor’s remuneration does not affect or harm the exercise of his professional judgment.

B-33 Directors’ Report Delek Group Ltd.

5. Auditors' fees

For the Year Ended December 31 2009 2008 Audit and tax Audit and tax services Other services services Other services Hours NIS ‘000 Hours NIS ‘000 Hours NIS ‘000 Hours NIS ‘000 The Company and wholly owned HQ companies Kost Forer Gabbay and Kasierer 8,788 2,113 99 75 9,357 2,160 - - Other consolidated companies Gadot Biochemical Industries Ltd. Kost Forer Gabbay and Kasierer 2,035 525 - - 2,050 482 410 175 Other auditors 1,570 686 265 147 1,280 813 - - Delek Real Estate Ltd. Kost Forer Gabbay and Kasierer and - - others - - - - 20,627 13,351 Delek Automotive Systems Ltd. Kost Forer Gabbay and Kasierer 1,750 571 - - 2,050 602 - - Delek The Israel Fuel Corporation Ltd. Kost Forer Gabbay and Kasierer 5,366 1,005 360 187 7,495 1,335 417 155 Ziv Haft 3,947 678 192 73 920 166 148 49 The Phoenix Holdings Ltd. Mainly Kost Forer Gabbay and Kasierer and Pahen Kaneh and Co.(1) 35,190 5,934 5,535 2,166 17,587 3,203 4,253 1,336 Delek Energy Systems Ltd. Ziv Haft 6,074 1,325 617 211 3,766 849 664 223 In respect of Yan Thethys Ziv Haft, Alfaya & Alfaya 618 187 - - 378 110 - - In respect of Delek & Avner Yam Tethys Ltd. Ziv Haft & Kost Forer 67 37 - - 77 30 - - Delek US Ernst & Young USA 7,768 7,067 - - 7,745 9,100 72 85 Republic Group (3) KPMG 5,500 2,680 - - 5,384 4,022 - - Delek Europe PWC - - 334 282 1,425 1,167 (4) Ernst & Young Netherlands 4,032 2,622 - - 1,458 1,375 - - Kost Forer Gabbay and Kasierer - - 1,191 519 - - 2,693 882 (1) Including data in respect of Excellence (paid to other auditors), which was consolidated for the first time in the reporting period (NIS 4,152,000 for 24,000 hours).

6. Proceeding for approval of the financial statements The Company’s Board of Directors is the body entrusted with overall supervision at the Company. As part of the approval process of the Company’s Financial Statements by the Board of Directors, a draft of the annual Periodic Report is submitted for review by the board members several days before the scheduled meeting for approval of the financial statements. In the course of the board meeting during which the financial statements are discussed and approved, the Company’s CEO and CFO review the key points of the financial statements in detail, the financial results, the financial position and cash flow of the Company, and data are presented regarding the Company’s operations along with a comparison with prior periods.

B-34 Directors’ Report Delek Group Ltd.

Four of the seven members of the board of directors have accounting and financial expertise, and their knowledge and experience contribute to the board's discussions. The Company’s auditor is invited to and attends the Board meeting at which the financial statements are discussed and approved, and reviews the financial statements and answers any questions or requested explanations concerning the financial statements prior to their approval. Also present are the Company’s CFO, Comptroller, Internal Auditor and General Counsel. After the discussion, a vote is held for approval of the financial statements. At its meeting on August 29, 2007, the Company’s Board of Directors resolved to set up a balance sheet committee which would have ultimate responsibility for the preparation and approval of financial statements in the Company, commencing from the financial statements at September 30, 2007. The balance sheet committee members are Mr. Moshe Amit, Mr. Ben Zion Zilberfarb (external director) and Mr Avi Harel, who have accounting and financial expertise. The Company’s auditor is invited to attend the meetings of the balance sheet committee as well as meetings of the Board of Directors at which the financial statements of the Company are discussed and approved. At its meeting on March 23, 2010, the balance sheet committee discussed the financial statements at December 31, 2009 It reviewed the material issues in the financial reporting, including transactions outside the normal course of business, the material assessments and critical estimates used in the financial statements, the reasonableness of the data, the accounting policy applied and the changes that had occurred in it, the implementation of the principle of proper disclosure in the financial statements and in the accompanying information, and the effects of the transition to IFRSs and the accounting policy applied. The Deputy CFO and the auditors provided the balance sheet committee with comprehensive reviews of matters of especially significant influence. The balance sheet committee presented its principal findings and remarks concerning the financial statements to the Board of Directors, and recommended their approval.

7. Effectiveness of internal controls on financial reporting and disclosure On November 24, 2009, the Knesset Finance Committee approved the proposal of the Securities Authority to adopt regulations dealing with the internal control of financial reporting and disclosure in corporations, so that they provide a reasonable measure of assurance as to the propriety of the financial statements and their compliance with the statutory provisions (Securities (Periodic and immediate reports) (Amendment No. 3) Regulations, 5770-2009) ("the Amendment")). The Amendment was published in the Official Gazette in December 2009, and takes effect in the periodic report at December 31, 2010 ("the Start Date"). However, under the provisions of the Amendment, in the period from publication of the Amendment to the Start Date, the directors' report must contain details of the stages of preparation and progress of the corporation for application of the provisions of the Amendment ("Project Implementation "). The purpose of the Amendment is to improve the quality of financial reporting and disclosure by strengthening the internal control set-up in the corporation. Disclosure concerning actions taken in the Company for Project Implementation at the date of this report: Amit Kornhauser, CPA, is responsible for Project Implementation in the Company, under the oversight of a steering committee established for compliance with the Amendment and chaired by the CFO of the Company ("the Steering Committee"). Since starting operation in January 2009, the Steering Committee has met on average once every a month to discuss progress in Project Implementation and gaps that come to light, and approves a plan of action to address those gaps. The Steering Committee prepared a methodology and work plan for Project Implementation, based on the following stages: Mapping the very material processes for financial reporting and disclosure, documenting the existing controls and related procedures, identifying the risks to financial reporting and disclosure while identifying very material control processes that provide a response to those risks. Mapping the gaps in control compared with desired controls. Review of the effectiveness of the controls, identifying and correcting flaws The opinion of the auditors and the internal auditor on the controls. At the date of this report, the Company has completed the mapping of the material processes for financial reporting and disclosure. For mapping the processes and identifying the very material

B-35 Directors’ Report Delek Group Ltd.

business risks to financial reporting and disclosure in the Company, a risk assessment and analysis model was used, which aggregates various quantitative and qualitative analyses. Of the processes mapped, those defined as very material for financial reporting and disclosure are these: 1. Closing the financial statements 2. Entity Level Control (ELC) 3. Information systems control (ITGC) 4. Income cycle 5. Purchasing and inventory cycle 6. Insurance reserves and contingent claims 7. Financial investments of insurance companies

8. Peer review The Company has consented to provide material required for implementation of a peer review sample initiated by the Institute of Certified Public Accountants in Israel, subject to the maintenance of confidentiality in respect of the material and a guarantee that there will be no conflict of interests among the reviewers.

9. Classification of negligible transactions On August 6, 2008 an amendment to the Securities (Periodic and immediate reports) Regulations, 5730-1970 {"the Reporting Regulations") came into force. Under the amendment, some of the reporting duties applicable to public companies were expanded, where they concern transactions with controlling shareholders or with another person in which the controlling shareholder has an personal interest ("Controlling Shareholder Transactions"), even for transactions which are not extraordinary transactions, as that term is defined in the Companies Law, but excluding transactions for which the latest financial statements have determined them to be negligible, as provided in Section 64(3)(d)(1) of the Securities (Preparing annual financial statements) Regulations, 5753-1993. On March 30, 2009, the Board of Directors of the Company resolved to adopt for the first time guidelines and principles for the classification of a transaction as a negligible transaction, both in connection with transactions with interested parties listed in the financial statements and in connection with Controlling Shareholder Transactions. These guidelines and principles were determined, inter alia, with attention to the character of the Company as one of he largest holdings companies in Israel with very extensive operations, to the volume of the Company's assets, to its variegated activities, to the character of the transactions it makes, and to the extent of their probable effect on the Company's operations and results. The Board of Directors of the Company determined that a transaction will be deemed a negligible transaction if all of the following conditions obtain: a) The amount of the transaction does not exceed 0.1% of the Company's equity after eliminating the non-controlling interest, according to the annual financial statements most recently published. b) It is not an extraordinary transaction (as defined in the Companies Law). c) The transaction is also negligible in its quality. d) In multi-year transactions (e.g. lease of a property for a number of years), the negligibility of the transaction will be tested on an annual basis (for example, does the annual lease exceed the amount noted above). e) In insurance transactions, the premium will be tested as the amount of the transaction, as opposed to the scope of the insurance coverage provided. f) Every transaction will be tested in its own right, but the negligibility of combined or contingent transactions will be tested in aggregate. g) In cases where a question arises as to the application of the above criteria, the Company will exercise judgment and will test the negligibility of the transaction on the basis of the thrust of the reporting regulations and guidelines above.

B-36 Directors’ Report Delek Group Ltd.

10. Compensation of senior employees When determining payment of salaries and bonuses for senior managers, the Board of Directors takes into consideration the status and role of each manager and his contribution to the Company’s operations and businesses. Salary expenses and benefits granted to senior managers and officers are reasonable, and reflect the Company’s achievements based on its results in comparison with 2008 and are on a par with market practice. The Board of Directors of the Company has not yet adopted resolutions concerning bonuses for senior employees in respect of 2009.

D. Disclosure relating to the Company's financial reporting

1. Critical accounting estimates Preparation of the financial statements of the Company and its consolidated companies in accordance with international accounting standards (IFRSs), requires their managements to use judgment, assessments, estimates and assumptions which impact the application of policy and the amounts stated in the financial statements. Among these estimates are those that require the exercise of judgment an uncertain environment and have significant impact on the presentation of the data in the financial statements. When making the estimates, the Company's management relies on past experience, various facts, external factors and reasonable assumptions according to the circumstances appropriate to each estimate. It is clarified that actual results might differ from these estimates. The following are accounting estimates which have the potential to be particularly highly influential and which re required by the Company and its investees when they preparing the consolidated financial statements. Contingent Liabilities In assessing the likelihood of success of lawsuits filed against the Company and its investees, the companies rely on the opinions of their legal counsel. The assessments of legal counsel are based on their best professional judgment, taking into account the stage of the proceedings and their legal experience in the various issues. Since the results of the claims will be determined in the courts, they could differ from the assessments. Impairment of goodwill The Group reviews the impairment of goodwill at least once a year. The review requires management to prepare estimates of future cash flows expected to derive from ongoing use in a cash-yielding unit and to estimate the appropriate discount rate for them. For more information, see Note 2 to the financial statements. Estimated proven gas reserves The evaluation of proven and developed gas reserves serves to determine the rate of impairment of the assets used in the operations during the reporting period. Impairment of investments relating to the discovery and production of proven and developed gas reserves is by the depletion method, i.e. throughout the accounting period, the assets are depreciated at the rate determined by the number of units of gas actually produced, divided by proven and developed gas reserves remaining according to estimates. The quantity of gas estimated in the pools that produce gas in the reporting period is determined each year, inter alia based on the opinions of outside experts who specialize in assessing oil and gas reserves. The assessment of proven and developed gas reserves according to these principles is a subjective process, and the assessments of different experts may differ substantially. Owing to the significance of the depreciation results, the above-mentioned changes could have a material effect on the results of operations and on the Groups financial condition. For more information, see Note 2 to the financial statements. Actuarial calculations and estimates The Group records insurance liabilities according to the accounting principles applicable to an insurer, inter alia based on actuarial calculations and estimates – see Note 2 to the financial statements. For more information about main accounting estimates, see Note 2B to the financial statements.

B-37 Directors’ Report Delek Group Ltd.

2. Events after the balance sheet date On material events after the balance sheet date, see Part A of this Directors' Report.

3. Disclosure of financial assets available for sale On disclosure of financial assets available for sale in accordance with FAQ 14, see Appendix B to this Directors' Report.

E. Buy-back of securities

During the reporting period, the Company bought back 10,963 of its own shares in consideration of NIS 2.8 million. During the reporting period, a subsidiary bought 22,462 Company shares in consideration of NIS 9.7 million.

F. Dedicated disclosure for debenture-holders

Details of the Company's liability certificates: On May 26, 2009, S&P Maalot announced that it was lowering the rating of debentures (series A, E-M, V and W) issued by the Company, to A from AA with stable outlook. On May 26, 2009, Midroog announced that is was setting a rating of A1 for debentures (series E-M, V and W) issued by the Company and for an additional raising of debentures which the Company is considering issuing, in the amount of NIS 300 million. On June 24, 2009. Midroog announced a rating of A1 for shekel debentures (series N and O), which eplaced existing CPI-linked series K and L. On September 6, 2009, Midroog announced rating of A1 for debentures (series P and Q) for raising up to NIS 350 million. On October 27, 2009. Midroog announced a rating of A1 for debentures (expansion of series O and R) for raising up to NIS 825 million.

B-38 Directors’ Report Delek Group Ltd.

Balance of par value Interest Original par Dec. 31, Book value of accrued in value 2009 balance at the books Stock exchange Issue (in NIS (in NIS Stated December 31, 2009 (in NIS value at Dec. 31, Series date millions) millions) interest Linkage (in NIS millions) millions) Repayment dates 2009 Trustee BLL Trust Company 8 Rothschild Blvd. F 12/2004 300 30 5.25% CPI 34 - 2006 - 2010 Non-negotiable Tel Aviv Tel.: 03-5170777 Idit Prizar BLL Trust Company 8 Rothschild Blvd. G 03/2005 200 52 3.95% CPI 60 1 2008 – 2011 Non-negotiable Tel Aviv Tel.: 03-5170777 Idit Prizar BLL Trust Company 8 Rothschild Blvd. H 09/2005 150 51 4.05% CPI 57 1 2011 Non-negotiable Tel Aviv Tel.: 03-5170777 Idit Prizar BLL Trust Company 8 Rothschild Blvd. I 12/2005 117 17 4.60% CPI 19 - 2010 Non-negotiable Tel Aviv Tel.: 03-5170777 Idit Prizar BLL Trust Company 8 Rothschild Blvd. J 12/2005 166 28 4.85% CPI 31 - 2012 Non-negotiable Tel Aviv Tel.: 03-5170777 Idit Prizar BLL Trust Company 8 Rothschild Blvd. K 07/2006 468 357 5.40% CPI 392 4 2018 Non-negotiable Tel Aviv Tel.: 03-5170777 Idit Prizar Reznick Trusts Ltd. 14 Yad Harutzim St. L 11/2006 1,100 596 5.35% CPI 659 7 2015 – 2017 Non-negotiable Tel Aviv Tel: 03-6393311 Liat Bachar-Segal Hermetic Trust (9175) Until listing Ltd. – 5.1%; 2013 – 2014, 113 Hayarkon St. M 03/2007 913 913 CPI 1,023 12 995 after listing 2019 – 2021 Tel Aviv – 4.6% Tel: 03-5274867 Dan Avnon

B-39 Directors’ Report Delek Group Ltd.

Balance of par value Interest Original par Dec. 31, Book value of accrued in value 2009 balance at the books Stock exchange Issue (in NIS (in NIS Stated December 31, 2009 (in NIS value at Dec. 31, Series date millions) millions) interest Linkage (in NIS millions) millions) Repayment dates 2009 Trustee Clal Finance Trusts 2007 Ltd. 37 Brhin Road N 07/2009 119 119 8.5% - 119 2 2018 127 Tel Aviv Tel" 03-6274827 Yuval Likber Clal Finance Trusts 2007 Ltd. 07/2009 37 Brhin Road O + 1,048 1,048 8.5% - 1,048 17 2015 – 2018 1,128 11/2009 Tel Aviv Tel" 03-6274827 Yuval Likber Strauss Lazar Trust Ltd. 17 Yitzchak SAdeh P 09/2009 260 260 5.5% - 260 4 2012 – 2015 260 Tel Aviv Tel: 03-7347777 Uri Lazar Strauss Lazar Trust Ltd. 17 Yitzchak SAdeh Q 09/2009 90 90 Variable - 90 - 2012 –2015 97 Tel Aviv Tel: 03-7347777 Uri Lazar Clal Finance Trusts 2007 Ltd. 37 Brhin Road R 11/2009 300 300 6.1% CPI 301 3 2016 – 2022 305 Tel Aviv Tel" 03-6274827 Yuval Likber Aora Fidelity Trust Ltd. 12 Begin Rd. V 06/2007 500 500 4.50% CPI 556 - 2012, 2019-2021 510 Ramat Gan Tel: 03-7510566 Iris Shalbin Strauss Lazar Trust Ltd. 10/2007 17 Yitzchak SAdeh W + 1,293 1,293 4.75% CPI 1,410 13 2011 – 2014 1,474 Tel Aviv 07/2009 Tel: 03-7347777 Uri Lazar

B-40 Directors’ Report Delek Group Ltd.

Remarks 1. The Company is in compliance with all the terms of the debentures and has met all the terms of the liability under the deed of trust. 2. Ratings of debentures: Rating at Rating at Rating Current time of Rating Current time of Series company rating issue company rating issue F Midroog A1 - S&P Maalot A AA G Midroog A1 - S&P Maalot A AA H Midroog A1 - S&P Maalot A AA I Midroog A1 - S&P Maalot A AA J Midroog A1 - S&P Maalot A AA K Midroog A1 - S&P Maalot A AA L Midroog A1 - S&P Maalot A AA M Midroog A1 - S&P Maalot A AA N Midroog A1 A1 S&P Maalot - - O Midroog A1 A1 S&P Maalot - - P Midroog A1 A1 S&P Maalot - - Q Midroog A1 A1 S&P Maalot - - R Midroog A1 A1 S&P Maalot - - V Midroog A1 - S&P Maalot A AA W Midroog A1 - S&P Maalot A AA

G. Additional information

1. Conversion of debentures and options A. In May 2009, NIS 1,120,169 par value of convertible debentures of the Group were converted to 3,890 of its ordinary shares. After the conversion, the Company's equity increased by about NIS 1 million. B. After the balance sheet date, in February – March 2010, 33,416 options series 5 were converted to 33,416 ordinary shares of the Company. The exercise price paid amounted to NIS 16.3 million.

2. Dividend A. On May 27, 2009, the Board of Directors of the Company resolved to distribute a dividend out of the profits of the first quarter of 2009, in the amount of NIS 72 million. The dividend was distributed on July 2, 2009. B. On August 30, 2009, the Board of Directors of the Company resolved to distribute a dividend out of the profits of the second quarter of 2009, in the amount of NIS 105 million. The dividend was distributed on September 24, 2009. C. On November 29, 2009 , the Board of Directors of the Company resolved to distribute a dividend out of the profits of the third quarter of 2009, in the amount of NIS 33 million. The dividend was distributed on January 5, 2010. D. On December 28, 2009 , the Board of Directors of the Company resolved to distribute a dividend out of the profits of the fourth quarter of 2009, in the amount of NIS 150 million. The dividend was distributed on January 18, 2010. E. On March 24, 2010, the Board of Directors of the Company resolved to distribute a dividend of NIS 100 million.

B-41 Directors’ Report Delek Group Ltd.

3. Company employees The Board of Directors expresses its respect and appreciation to the management of the Company, to the management of its investees and to all the employees for their dedicated work and their contribution to the advancement of the Company.

Sincerely,

Gabriel Last Asi Bartfeld Chairman of the Board CEO

B-42 Directors’ Report Delek Group Ltd.

Appendix A to the Directors’ Report

Breakdown of payments of principal and interest of debentures and bank loans of the HQ companies at December 31, 2009 (in NIS millions). Delek Group – Headquarters

2015 2010 2011 2012 2013 2014 Total onwards

Principal 83 440 581 615 615 3,725 6,059

Debentures Interest 337 333 313 286 255 734 2,258

Total 420 773 894 901 870 4,459 8,317

Delek Investments and Properties

2015 2010 2011 2012 2013 2014 Total onwards

Principal 46 25 4 3 1 44 123

Bank loans Interest 6 3 3 3 2 4 21

Total 52 28 7 6 3 48 144

Delek Finance US

2015 2010 2011 2012 2013 2014 Total onwards

Principal 140 304 403 - - - 847

Bank loans Interest 24 17 10 - - - 51

Total 164 321 413 - - - 898

Delek Petroleum

2015 2010 2011 2012 2013 2014 Total onwards

Principal 28 118 - 118 87 84 435 Debentures (1) Interest 25 22 16 15 7 4 89

Principal 70 54 18 - - - 142

Bank loans Interest 4 1 1 - - - 6

Total 127 195 35 133 94 88 672

(1) The debentures do not include debentures raised in the past and given as a loan (BTB) to Delek Israel.

B-43 Directors’ Report Delek Group Ltd.

Appendix B to the Directors’ Report

Below are the financial instruments available for sale in respect of which the impairment was charged to equity at the rate of decline in the fair value of the asset in relation to its original cost (in NIS millions): Marketable debt instruments:

Rate of decrease in fair value Up to 6 6 – 9 9-12 More than of the assets months months months 12 months Total Up to 20% 19 - - 10 29 20% - 40% - - - - - More than 40% - - - - - Total 19 - - 10 29

The considerations for determining that decreases in the fair value of financial assets were charged directly to equity and not to profit and loss: In examining impairment of value of financial assets available for sale which are capital instruments, the Group looks at the rate of the difference between the fair value of the asset to its original cost, noting changes in the fair value of the asset during the time when that fair value was less than its original cost, and changes in the technological, economic, legal or market environment in which the company that issued the instrument operates. Impairment is usually considered significant when the decrease is 20% of the original cost, and is considered ongoing when the impairment continues over an entire year. Debt instruments are reviewed specifically for impairment, for every instrument for which the impairment is more than 20% of the balance of the investment, taking into account existing information on each entity that issued the debt instrument.

B-44 28/03/2010

DELEK GROUP LTD.

Consolidated Financial Statements for the Year Ended 31 December, 2009

Contents

Page

Auditor’s Report 2

Consolidated Balance Sheets 3-4

Consolidated Statements of Income 5

Consolidated Statements of Comprehensive Income 6

Consolidated Statements of Changes in Equity 7-9

Consolidated Statement of Cash Flows 10-14

Notes to the Consolidated Financial Statements 15-173

Appendices to the Financial Statements – List of the Principle Partnerships and Investees 172-176

------

C-1 DELEK GROUP LTD.

Consolidated Balance Sheets

December 31 2009 2008 Note NIS millions

Current assets

Cash and cash equivalents 3 3,997 1,895 Performance-based cash and cash equivalents in insurance companies 4 1,103 605 Short-term investments in the finance sector (mainly exchange traded funds and deposit) 5 16,156 - Short-term investments in insurance companies 11 2,097 1,995 Other short-term investments 6 662 1,039 Financial derivatives 20 129 Trade receivables 7 3,660 2,596 Insurance premium receivables 8 994 936 Other receivables 9 872 1,022 Taxes receivable 284 292 Reinsurance assets 29 2,022 1,677 Inventory 10 1,683 2,482 Deferred acquisition expenses in insurance companies 18 364 390

33,914 15,058

Assets held for sale 14(C) 206 4,183

34,120 19,241

Non-current assets

Financial investments of insurance companies 11 28,317 22,873 Long-term loans, deposits and receivables 12 972 1,382 Investments in other financial assets 13 1,418 1,187 Investment in investees 14 2,206 2,948 Investment property 15 451 13,354 Land held for construction - 462 Investments in oil and gas exploration and production 16 1,331 1,478 Reinsurance assets 29 1,571 1,476 Property, plant and equipment, net 17 6,798 6,199 Deferred acquisition expenses in insurance companies 18 680 737 Advance expenses (primarily for operating lease) 19 408 313 Structured bonds 20 873 - Goodwill 21 3,242 2,873 Other intangible assets, net 21 1,750 1,665 Deferred taxes 43(F) 219 441

50,236 57,388

84,356 76,629

The accompanying notes are an integral part of the consolidated financial statements.

C-3 DELEK GROUP LTD.

Consolidated Balance Sheets

December 31 2009 2008 Note NIS millions Current liabilities

Credit from banks and others 22 3,741 6,868 Trade payables 23 2,879 1,901 Other payables 24 3,540 3,493 Exchange traded funds and deposit 25 15,639 - Taxes payable 86 136 Financial derivatives 82 171 Dividend due 183 - Insurance reserves and outstanding claims 31 5,430 4,742

31,580 17,311

Liabilities for held for sale assets - 2,733

31,580 20,044 Non-current liabilities

Loans from banks and others 26 5,161 14,231 Debentures convertible into shares of subsidiaries 27 - 107 Other debentures 28 10,702 10,052 Structured bonds 20 933 - Option warrants and the convertible component of debentures 9 134 Financial derivatives 114 1,217 Liabilities for employee benefits, net 30 208 207 Insurance reserves and outstanding claims 31 29,352 23,944 Provisions and other liabilities 32 839 620 Deferred taxes 43(F) 870 1,710

48,188 52,222 Equity attributable to the Company’s shareholders 35

Equity 13 13 Share premium 1,590 1,583 Option warrants 25 - Retained earnings 869 1,044 Adjustments for translation of financial statements of foreign operations (166) (928) Other capital reserves (94) (89) Treasury shares (129) (105)

2,108 1,518

Non-controlling interest 2,480 2,845

Total equity 4,588 4,363

84,356 76,629

March 24, 2010 Date of approval of the financial Gabriel Last Asi Bartfeld Barak Mashraki statements Chairman of the CEO CFO Board

The accompanying notes are an integral part of the consolidated financial statements.

C-4 DELEK GROUP LTD.

Consolidated Statements Of Income

Year ended December 31 2009 2008 *) 2007 *) NIS millions Note (Except for net earnings (loss) per share)

Revenue 45(B) 43,447 46,240 39,118 Cost of revenue 37 37,032 40,651 32,989

Gross profit 6,415 5,589 6,129

Selling, marketing and gas station operating expenses 38 3,426 3,157 2,391 General and administrative expenses 39 1,768 1,476 1,067 Other revenue (expenses), net 40 311 40 (35)

Profit from ordinary operations 1,532 996 2,636

Finance revenue 41 609 340 198 Finance expenses 41 1,449 1,798 1,068

692 (462) 1,766 Gain from disposal of investments in investees, net 14 518 69 367 Group share in profits (losses) of associates and partnerships, net 191 (12) 174

Profit (loss) before income tax 1,401 (405) 2,307 Income tax (tax benefit) 43(G) 215 (37) 607

Profit (loss) from continuing operations 1,186 (368) 1,700 Profit (loss) from discontinued operations 14(G(1) 17 (1,945) 536

Net profit (loss) 1,203 (2,313) 2,236

Attributable to: Company shareholders 864 (1,809) 1,297 Non-controlling interest 339 (504) 939

1,203 (2,313) 2,236 Net earnings (loss) per share attributable to Company shareholders (NIS) 44

Basic net earnings (loss) Profit (loss) from continuing operations 77.44 (50.88) 92.00 Profit (loss) from discontinued operations (0.53) (105.11) 20.45

76.91 (155.99) 112.45 Diluted net earnings (loss) Profit (loss) from continuing operations 75.49 (52.48) 90.50 Profit (loss) from discontinued operations (0.53) (111.00) 20.19

74.96 (163.48) 110.69

*) Reclassified, see Note 14(G)(1) The accompanying notes are an integral part of the consolidated financial statements.

C-5 DELEK GROUP LTD.

Consolidated Statements Of Comprehensive Income

Year ended December 31 2009 2008 *) 2007 *) Note NIS millions

Net profit (loss) 1,203 (2,313) 2,236

Other comprehensive income (loss) from continuing operations

Profit (loss) for available-for-sale assets, net 285 (377) 89

Profit (loss) for cash flow hedges, net (115) (13) 13

Adjustments for translation of financial statements of foreign operations 19 (2) (409)

Company’s share in other comprehensive income of affiliates 12 6 -

Other comprehensive income (loss) from continuing operations, net 201 (386) (307)

Other comprehensive income (loss) from discontinued operations (see Note 14G1) 198 (1,262) (4)

Total other comprehensive income (loss) 399 (1,648) (311)

Total comprehensive income (loss) 1,602 (3,961) 1,925

Attributable to:

Company shareholders 1,113 (2,818) 1,079 Non-controlling interest 489 (1,143) 846

1,602 (3,961) 1,925

*) Reclassified, see Note 14(G)(1)

The accompanying notes are an integral part of the consolidated financial statements.

C-6 DELEK GROUP LTD.

Consolidated Statements of Changes In Equity

Attributable to Company shareholders Adjustments for translation of financial statements Other Non- Share Premium Retained of foreign capital Treasury controllin Total capital on shares earnings operations funds *) shares Total g interest equity NIS millions

Balance as of January 1, 2007 13 1,543 2,310 - 227 (87) 4,006 2,596 6,602

Total comprehensive income - - 1,297 (339) 121 - 1,079 846 1,925

Debentures converted into Company shares **) 8 - - - - 8 - 8 Share options exercised **) 10 - - - - 10 - 10 Sale of treasury shares - 13 - - - 87 100 12 112 Dividend - - (590) - - - (590) - (590) Decrease in the holding in subsidiaries - - - - (17) - (17) 980 963 Cost of share-based payment, net ------114 114 Acquisition of a subsidiary consolidated for the first time ------494 494 Dividend to a non-controlling interest ------(455) (455)

Balance as of December 31, 2007 13 1,574 3,017 (339) 331 - 4,596 4,587 9,183

*) Primarily capital reserve for profit (loss) for available-for-sale financial assets, net

**) Represents an amount less than NIS 1 million

The accompanying notes are an integral part of the consolidated financial statements.

C-7 DELEK GROUP LTD.

Consolidated Statements of Changes In Equity

Attributable to Company shareholders Adjustments for translation of financial statements Other Non- Share Premium Retained of foreign capital Treasury controlling Total capital on shares earnings operations funds*) shares Total interest equity NIS millions

Balance at January 1, 2008 13 1,574 3,017 (339) 331 - 4,596 4,587 9,183

Total comprehensive loss - - (1,809) (589) (420) - (2,818) (1,143) (3,961)

Share options exercised - **) 9 - - - - 9 - 9 Acquisition of treasury shares - - - - - (105) (105) - (105) Dividend - - (164) - - - (164) - (164) Decrease in the holding in subsidiaries ------82 82 Cost of share-based payment, net ------54 54 Acquisition of non-controlling interests ------(408) (408) Dividend to a non-controlling interest ------(327) (327)

Balance at December 31, 2008 13 1,583 1,044 (928) (89) (105) 1,518 2,845 4,363

*) Primarily capital reserve for profit (loss) for available-for-sale financial assets, net

**) Represents an amount less than NIS 1 million

The accompanying notes are an integral part of the consolidated financial statements.

C-8 DELEK GROUP LTD.

Consolidated Statements of Changes In Equity

Attributable to Company shareholders Adjustments for translation of financial statements Other Non- Share Premium Option Retained of foreign capital Treasury controlling Total capital on shares warrants earnings operations funds *) shares Total interest equity NIS millions

Balance at January 1, 2009 13 1,583 - 1,044 (928) (89) (105) 1,518 2,845 4,363

Total comprehensive income - - - 864 188 61 - 1,113 489 1,602 Acquisition of treasury shares ------(33) (33) - (33) Sale of treasury shares by subsidiaries - 6 - - - - 9 15 8 23 Acquisition of non-controlling interests ------(109) (109) Distribution of a subsidiary’s shares as a dividend in kind, see Note 14(G)(1) - - - (679) 574 (66) - (171) (835) (1,006) Dividend - - - (360) - - - (360) - (360) Issue of option warrants - - 25 - - - - 25 - 25 Debentures converted into Company shares - **) 1 - - - - - 1 - 1 Cost of share-based payment, net ------44 44 Consolidation of an affiliate ------55 55 Decrease in holding in subsidiaries ------130 130 Dividend to a non-controlling interest and share issue ------(147) (147)

Balance at December 31, 2009 13 1,590 25 869 (166) (94) (129) 2,108 2,480 4,588

*) Primarily capital reserve for profit (loss) for available-for-sale financial assets, net. **) Represents an amount of less than NIS 1 million.

The accompanying notes are an integral part of the consolidated financial statements.

C-9 DELEK GROUP LTD.

Consolidated Statements of Cash Flows

Year ended December 31 2009 2008 *) 2007 *) NIS millions

Cash flows from operating activities

Net profit (loss) 1,203 (2,313) 2,236 Adjustments to reconcile cash flows from continuing operating activities (a) 2,107 3,903 (502)

Net cash flows from continuing operating activities 3,310 1,590 1,734 Net cash from (used for) discontinued operating activities (32) 89 (167)

Net cash flows from operating activities 3,278 1,679 1,567

Cash flow from investing activities

Acquisition of property, plant and equipment and other assets (1,517) (914) (907) Acquisition of investment property (7) (115) (134) Proceeds from sale of property, plant and equipment and investment property 118 60 78 Net proceeds from an insurance company for damaged property, plant and equipment 162 - - Proceeds from sale (acquisition) of financial assets, net (185) (36) 349 Repayment (grant) of loans to associates, net (13) (308) (77) Short-term investments 36 - (251) Increase in joint ventures for oil and gas exploration (353) (228) (114) Proceeds from sale of investments in investees 504 80 393 Proceeds from the sale of a previously consolidated company (c) 317 - - Payment for the option to acquire a subsidiary (340) - - Investment in investees (76) (220) (845) Acquisition of operations and companies consolidated for the first time (b) 136 (678) (3,353) Acquisition of non-controlling interest in subsidiaries (136) (350) (2) Collection (providing) of loans to others, net (102) (36) 39

Net cash used for continuing investing activities (1,456) (2,745) (4,824) Net cash from (used in) discontinued investment activities 333 (769) (4,819)

Net cash used for investing activities (1,123) (3,514) (9,643)

Cash flow from financing activities

Short-term credit from banks and others, net (1,345) 1,416 (1,014) Long-term loans received 3,992 1,441 3,181 Long-term loans repaid (3,847) (955) (524) Issue of shares to non-controlling interest in subsidiaries 216 39 412 Dividend paid (177) (324) (336) Dividend paid to non-controlling interest in subsidiaries (169) (426) (661) Share options exercised - 6 6 Acquisition of treasury shares (33) (105) - Sale of treasury shares 31 - 112 Cash from a previously consolidated subsidiary distributed as a dividend (349) - - Issue of debentures and convertible debentures 2,769 416 2,552 Issue of option warrants by the Company 25 - - Repayment of debentures and convertible debentures (443) (199) (146)

Net cash from continuing financing activities 670 1,309 3,582 Net cash from (used for) discontinued financing activities (247) 61 5,782

Net cash flows from financing activities 423 1,370 9,364

*) Reclassified, see Note 14(G)(1)

The accompanying notes are an integral part of the consolidated financial statements.

C-10 DELEK GROUP LTD.

Consolidated Statements of Cash Flows

Year ended December 31 2009 2008 *) 2007 *) NIS millions

Translation differences for cash balances of foreign operations – continuing operations 6 (4) (48)

Translation differences for cash balances of foreign operations – discontinued operations 16 (152) (47)

Increase in cash and cash equivalents – continuing operations 2,530 150 444

Increase (decrease) in cash and cash equivalents – discontinued operations 70 (771) 749

Balance of cash and cash equivalents at beginning of year (including performance-based balance) 2,500 3,121 1,928

Balance of cash and cash equivalents at end of year (including performance-based balance) 5,100 2,500 3,121

*) Reclassified, see Note 14(G)(1)

The accompanying notes are an integral part of the consolidated financial statements.

C-11 DELEK GROUP LTD.

Consolidated Statements of Cash Flows

Year ended December 31 2009 2008 *) 2007 *) NIS millions

(A) Adjustments to reconcile statement of cash flows from continuing operating activities:

Income and expenses not involving cash flows:

Loss (profit) from discontinued operation, net (17) 1,945 (536 ) Depreciation, depletion, amortization and impairment of assets 975 863 488 Deferred taxes, net 324 (277) 63 Increase (decrease) in employee benefit liabilities, net (3) 26 14 Decrease (increase) in the value of loans provided, net 25 (192) 137 Earnings from issue of shares to a third party in an investee (5) - - Proceeds from the sale of property, plant and equipment, real estate and investments, net (634) (107) (280) Profit for compensation from an insurance company for damaged property, plant and equipment (162) - - Negative goodwill (15) (53) - Group’s share in losses (profits) of partnerships and affiliates (1) (167) 103 (217 ) Net change in fair value of financial assets and derivatives (5) 194 59 Increase in value of long-term liabilities, net 845 273 61 Decrease (increase) in deferred acquisition expenses 36 (30) (150) Cost of share-based payment 54 60 87 Change in financial investments of insurance companies, net (5,216) 4,070 (2,510 ) Investments, less proceeds from the sale of available-for-sale financial assets in insurance companies, net 365 (365) (1,558) Increase (decrease) in reserves and outstanding claims in insurance companies 6,102 (2,162) 3,485 Increase in reinsurance assets (532) (266) (263) Proceeds from early redemption and exchange of debentures (82) (30) -

Changes in asset and liability items:

Decrease (increase) in trade receivables (1,482) 954 (417 ) Decrease (increase) in other receivables 247 230 (266 ) Decrease (increase) in inventory 289 (162) (173) Decrease (increase) in other assets, net (516) (47) (52) Increase (decrease) in trade payables 997 (1,336) 965 Increase (decrease) in other payables 684 212 561

2,107 3,903 (502 )

(1) Net of dividends received 24 91 43

*) Reclassified, see Note 14(G)(1)

The accompanying notes are an integral part of the consolidated financial statements.

C-12 DELEK GROUP LTD.

Consolidated Statements of Cash Flows

Year ended December 31 2009 2008 2007 NIS millions

(B) Acquisition of operations and companies consolidated for the first time (b)

Working capital, net (excluding cash) 124 210 204 Short-term finance investments (9,462) - - Long-term finance investments (2,057) - - Property, plant and equipment, real estate, investments and other property (including goodwill) (1,319) (1,134) (4,050) Short-term finance liabilities 9,307 - - Long term liabilities 3,102 54 477 Non-controlling interest 55 - 16 Decrease in investments in investees 386 192 -

136 (678) (3,353) (C) Proceeds from the sale of a previously consolidated company

Oil and gas assets 332 - - Capital reserve (2) - - Loss from the disposal of an investment in a subsidiary (4) - - Less receivables for the proceeds of the sale (9) - -

317 - - (D) Significant non-cash activities

Credit acquisitions of property, plant and equipment 395 16 8

Liability for divesture of assets 1 1 9

Dividend and earnings to pay to a minority in subsidiaries 49 11 55

Dividend declared 183 - 160

Dividend and profits to receive from affiliates - 26 22

Exercise of options for Company shares - 3 4

Debentures converted into Company shares 1 - 8

Debentures converted into subsidiary shares - - 63

Acquisition of an investee by issuing shares in a subsidiary in the USA - - 213

Investment in an investee against repayment of a loan - - 75

Investment in oil and gas assets 43 129 -

Acquisition of participating units of an affiliate in return for allotment of shares in a subsidiary 250 - -

Receivables for the sale of an investee 9 - - Acquisition of non-controlling interests in a subsidiary 6 - -

The accompanying notes are an integral part of the consolidated financial statements.

C-13 DELEK GROUP LTD.

Consolidated Statements of Cash Flows

Year ended December 31 2009 2008 2007 NIS millions

(E) Cash and cash equivalents

Balance of cash and cash equivalents at beginning of year:

Cash and cash equivalents 1,895 2,815 1,718 Performance-based cash and cash equivalents in insurance companies 605 306 210

2,500 3,121 1,928

Cash and cash equivalents at the end of the year:

Cash and cash equivalents 3,997 1,895 2,815 Performance-based cash and cash equivalents in insurance companies 1,103 605 306

5,100 2,500 3,121

(F) Additional information on cash flows

Cash paid during the year for:

Interest 902 1,617 1,165

Income tax 111 319 328

Cash received during the year for:

Interest 997 144 161

Dividend 156 105 123

The accompanying notes are an integral part of the consolidated financial statements.

C-14 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 1 – GENERAL

A. Delek Group Ltd. ("the Company") is a holding company for two major companies that coordinate the operations of the Group companies as follows: Delek Petroleum Ltd. ("Delek Petroleum"), which coordinates the fuel sector and the operation of gas stations and convenience stores in Israel, Europe and the USA, including the operation of the oil refinery and marketing of fuels in the USA; and Delek Investments and Properties Ltd. ("Delek Investments"), which coordinates the remaining operations of the investees, including automotive, oil and gas exploration and production, insurance in Israel and in the USA, infrastructure, biochemistry, and other operations. See also Note 45 for details of segment operations

B. See Note 14(G) for distribution of Delek Real Estate shares as a dividend in kind.

C. Definitions

In these financial statements -

The Company - Delek Group Ltd.

Group - The Company and its subsidiaries and partnerships

Subsidiaries - Companies controlled by the Company (as defined in IAS 27) and their financial statements are consolidated with the financial statements of the Company

Affiliates - Companies and partnerships over which the Company exercises material influence or has a joint control agreement and that are not subsidiaries, and the Company's investment in these companies is stated in the Company’s financial statements using the equity method

Investees - Subsidiaries or affiliates. See also the appendix to the financial statements listing the principle partnerships and investees

Interested - As defined in the Securities Regulations (Annual Financial Statements), parties and 5770-2010 controlling shareholders

Related - As defined in IAS 24 parties

C-15 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

A. Basis of presentation

The financial statements of the Company have been prepared on the basis of cost, with the exception of investment property, financial investments, derivatives and certain financial instruments and liabilities in respect of share-based payments, which are measured at fair value for each reporting period.

The Company elected to present the statement of income according to the method for characterizing operations.

Reporting format

These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). These standards include the following:

1. International Financial Reporting Standards (IFRS) 2. International Accounting Standards (IAS) 3. International Financial Reporting Interpretations Committee (IFRIC) and Standing Interpretations Committee (SIC)

In addition, the financial statements have been prepared in accordance with the Securities Regulations (Annual Financial Statements), 5770-2010, insofar as these regulations are applicable to consolidated insurance companies.

Consistent accounting policy

The accounting policy applied in the consolidated financial statements has been applied consistently to all the periods presented.

Changes in accounting policy in view of application of new standards

IAS 1 – Presentation of Financial Statements (revised)

Under the amendment to IAS 1, a separate statement is required for comprehensive income. This statement includes the net profit taken from the statement of income, all items charged directly to equity in the reporting period and are not a result of transactions with shareholders as shareholders (other comprehensive income), such as adjustments due to translation of financial statements, adjustments for fair value of available-for-sale financial assets, adjustments for the revaluation of property, plant and equipment and the effect of tax on these items, which is also recognized in equity, with appropriate attribution between the Company and the non-controlling interests. Alternately, the other comprehensive income items can be stated with the items in the statement of income in one statement called the statement of comprehensive income, which replaces the statement of income, with appropriate attribution between the Company and the non-controlling interests. Items charged to equity, which are a result of transactions with shareholders as shareholders (such as raising capital and distributing a dividend) are presented in the statement of changes in equity. The last row will also be transferred from the statement of comprehensive income, with appropriate attribution between the Company and the non-controlling interests. The Company elected to present the statement of comprehensive income in a separate statement.

The amendment is effective from January 2009 with retrospective application inr comparative information.

C-16 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

A. Basis of presentation (contd.)

IFRS 8 – Operating Segments

IFRS 8 addresses the presentation of operating segments and replaces IAS 14. In accordance with the standard, the entity adopted the management approach when reporting on the financial results of the operating segments. Segment information is the information used internally by the management to assess segment results and make operating decisions.

The Company applies IFRS 8 commencing from January 1, 2009 with retrospective application in comparative information.

Following initial application of the Standard, fuel operations in the USA are presented as one segment without a division between refinery and marketing operations and operations of stores and convenience stores. The Group also includes operating results of affiliates as part of segment profit, since management reports are mainly based on the Company’s investment in each investee.

IAS 23 – Borrowing Costs (revised)

Under the amendment to IAS 23, an entity is required to capitalize borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset. A qualifying asset is an asset that takes a substantial period of time to prepare for its intended use or sale. This includes property, plant, and equipment and inventory requiring a substantial period to prepare for sale. The option of immediately recognizing these costs as an expense was removed.

The Amendment did not have an effect on the financial statements of the Group, as in prior periods, the Group also capitalized borrowing costs to qualifying assets.

IAS 40 (revised) Investment Property

Under the amendment to IAS 40, investment property under construction or development for future use as investment property is accounted for as investment property when the fair value method is applied and is reliably determinable. When the fair value is not reliably determinable, investment property is measured according to cost during the construction period until either construction is completed or its fair value becomes reliably determinable, whichever earlier.

The amendment is effective prospectively from January 1, 2009. Initial application of the amendment does not have a material effect on the financial statements.

IFRS 2 – Share Based Payment (revised)

Under the amendment to IFRS 2, vesting conditions are restricted to service and performance conditions and the removal of a grant that includes conditions other than vesting conditions, by the Company or by another party, will be accounted for by accelerating the vesting period and not by forfeiture. Conditions other than service or performance conditions are accounted for as non-vesting conditions and therefore they are taken into account in the estimation of the fair value of the instrument at the grant date.

The amendment is effective from January 2009 with retrospective application in comparative information. Initial application of the amendment does not have a material effect on the financial statements.

IAS 16 – Property, Plant and Equipment (revised)

Under the amendment to IAS 16, property, plant and equipment held for rental and regularly sold in the course of an entity’s ordinary activities are classified as inventory at the date the entity ceases to rent them and accordingly, the sale is recognized in the statement of income as gross revenue and not as net profit only. At the same time, cash spent, similar to cash received, for an investment in assets will be stated as operating activities in the statement of cash flow and not as an investment activity.

C-17 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

A. Basis of presentation (contd.)

The amendment is effective from January 2009 with retrospective application inr comparative information. Initial application of the amendment does not have a material effect on the financial statements.

IAS 28 – Accounting for Investment in Associates (revised)

Under the amendment to IAS 28, an investment in an associate is tested for impairment with respect to the entire carrying amount of the investment. Accordingly, the impairment loss recognized on the investment is allocated to the entire carrying amount of the investment, and not is not allocated specifically. Therefore, under certain conditions, the full amount of the impairment loss that was recognized in the past may be reversed when the conditions for reversal are met.

The amendment is effective prospectively from January 1, 2009. Initial application of the amendment does not have a material effect on the financial statements.

IAS 38 – Intangible Assets, (revised)

Under the amendment to IAS 38, advertising, marketing or sales promotion costs are recognized as an expense when the company has access to the advertising products or when the company receives those services. For these purposes, the activities include production of catalogs and advertising brochures. In addition, the standard is amended to allow the unit of production amortization method for all intangible assets even if it results in a lower amount of accumulated amortization than under the straight-line method.

The amendment is effective retrospectively from January 1, 2009. First time application of the amendment does not have a material effect on the interim financial statement

IFRS 7 - Financial Instruments: Disclosure

The amendment to IFRS 7 expands the disclosures required in respect of fair value measurements and liquidity risk. Under the amendment, additional disclosure is required, inter alia, for the source of information used for the measurement, using a three-level hierarchy for fair value measurement for each financial instrument. The amendment also requires reconciliation between opening and closing balances, for measuring fair value of level three (inputs not based on observable market data), in addition to disclosure for significant transfers between levels of the hierarchy.

The amendment is applied prospectively for financial statements commencing on January 1, 2010 (without comparative information).

IFRIC 13 – Customer Loyalty Programs:

The interpretation applies to purchase benefits and customer incentives , which the Company awards as part of a sales transaction to encourage the customer to make a future purchase. Subject to the conditions, the customer is able to exercise the benefit and receive, free of charge, or at a discount, a product or service.

Under the interpretation, the purchase benefits and customer incentives that are awarded are accounted for as a separate component from the sales transaction for which they were awarded. The proceeds from the sales are allocated between the incentive given and the other sales components (such as the main product or service), taking into consideration the fair value of the sales incentive.

The amendment is effective retrospectively from January 1, 2009. Initial application of the interpretation does not have a material effect on the financial statement.

C-18 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

A. Basis of presentation (contd.)

IFRIC 15 – Agreements for the Construction of Real Estate

The interpretation provides guidance for examining whether transactions for the construction of real estate is within the scope of IAS 11 Construction Contracts or IAS 18 Revenue. When the agreement is specifically for the establishment of an asset or a combination of assets, so that the purchaser is able to determine the specifications and the changes, the agreement is in the scope of IAS 11. Therefore revenue will be recognized according to the stage of completion. However, when the buyer is unable to participate in determining the specification, or is restricted, the transaction is for the sale of real estate and is within the scope of IAS 18.

The interpretation is applied retrospectively as from January 1, 2009. Initial application of the interpretation does not have a material effect on the financial statements.

IFRIC 16 - Hedges of a Net Investment in a Foreign Operation

The interpretation prescribes that risks for exchange rate fluctuations can only be hedged in relation to the company's functional currency, and not its presentation currency. In addition, exchange rate risks can be hedged in relation to the functional currency of each subsidiary in the group. The hedging instrument can be held by any company in the group.

The interpretation is effective prospectively as from January 1, 2009. Initial application of the interpretation does not have a material effect on the financial statements.

IFRIC 18 – Transfers of Assets from Customers

IFRIC 18 (“the Interpretation”) provides guidance for accounting when an entity receives from a customer an item of property, plant and equipment or cash to supply services, construct or acquire assets.

B. Principal judgments, estimates and assumptions in the preparation of the financial statements

Judgments

When applying the main accounting principals in the financial statements, the Group has made the following judgments which have the most significant effect on the amounts recognized in the financial statements:

− Impairment of available-for-sale financial assets

At each balance sheet date, the Group reviews whether there is objective evidence that the value of an asset has been impaired. To assess impairment, the Group applies judgment for indications of objective evidence referring to the degree of impairment in fair value and the continuation of the impairment period. See also section L.

− Operating lease of investment property

The Group classifies its investment property portfolio as an operating lease as the risks and benefits involved in ownership of these assets remained effectively in its possession.

− Embedded derivatives

As part of Delek Israel’s operations in gas station and commercial facilities, Delek Israel has contracts with the owners of gas stations, on various dates and for various periods, in which Delek Israel leases the gas stations.

C-19 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

Judgments (contd.)

− Embedded derivatives (contd.) In some of these contracts (approximately 50 contracts), the leasing party has, at predetermined intervals, the option of choosing between two or three options (US dollar, CPI or the marketing margin of the gasoline under government supervision) for the linkage of the rental fees during the next period, as set out in the contract.

The management of the Group considered and examined the need to separate and measure the options for determining linkage and, in its opinion, based on the expert opinion that it received, it is not necessary to separate and measure the options. In accordance with this position, as long as it is not required to separate and measure the embedded derivative of each linkage option separately from the host contract (since there is a close connection between the economic characteristics and risks of the host contract and the embedded derivative), there is no need to separate and measure the options since it, too, is closely related the economic characteristics and risks of the host contract and the chosen embedded derivative.

In this context, it is noted that in May 2008, the Israel Accounting Standards Board prescribed that the dollar is the commonly used currency for transactions in Israel under agreements signed up to December 31, 2006.

− Categories of insurance contracts and investment contracts

Insurance contracts are contracts in which the insurer takes a significant insurance risk for another party. Management considers each contract, or a group of similar contracts, and if they involve significant insurance risk, they should be classified as insurance contracts or investment contracts.

− Classification and purpose of financial investments

Management exercises judgment when classifying and designating the financial investments into the following groups:

− Financial assets at fair value through profit or loss − Held-to-maturity investments − Loans and borrowings − Available-for-sale financial assets

See section K below.

C-20 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

Estimates and assumptions

The preparation of the financial statements requires management to make judgments and use estimates, assessments and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Estimates and underlying assumptions are reviewed on an ongoing basis. Changes in the accounting estimates are recognized as incurred.

Presented hereunder is information about the main assessments used in the financial statements in respect of uncertainty as of the balance sheet date and the critical estimates made by the Group and for which significant change in the estimates and assumptions could change the value of the assets and liabilities in the financial statement in the next reporting period:

− Impairment of non-financial assets

In addition, the Group examines impairment of goodwill at least once a year. The examination requires management to assess the future cash flows expected from continued use of the cash- generating unit and to estimate the discounted rate for these cash flows. See additional information in section U below.

As from the acquisition date, goodwill is attributable to a cash generating unit or a group of cash generating units which are expected to generate benefits from the synergy of the combination

− Impairment of financial assets

When there is objective evidence of impairment on loans and borrowings recorded at amortized cost, or on available-for-sale financial assets, the amount of the loss is recognized in profit or loss. See Note V below. Management is required to determine whether there is such objective evidence.

− Doubtful debts

The provision for doubtful debts is calculated specifically for debts which, in the opinion of the Group’s management, are unlikely to be collected. In addition, the Group enters a provision for groups of customers that are estimated collectively for impairment based on the characteristics of their credit risk. Impaired trade receivables are derecognized when it is determined that these debts are uncollectible.

− Deferred acquisition costs

Acquisition costs of life assurance policies are deferred and amortized over the term of the policy. Recoverability of deferred acquisition costs are assessed once a year using assumptions regarding the rates of their cancellation, mortality and morbidity rates and other variables. If these assumptions are not realized, accelerated amortization or even derecognition of the deferred acquisition costs could be required.

− Liabilities for insurance contracts

Liabilities for insurance contracts are based on actuarial assessment methods and the assumptions described in section V(1) for life insurance, in section V(3) for health insurance and in section V(2) for general insurance.

C-21 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

Estimates and assumptions (contd.)

The actuarial estimates and assumptions are based on past experience and are based, primarily, on the past behavior and claims which represent what will happen in the future. The changing risk factors, frequency or severity of the events, and the change in the legal situation could have a material effect on the level of liabilities for insurance contracts.

− Estimates of proven gas reserves

Estimates of the proven and developed gas reserves are used to determine the amortization rate of the assets used in the operations over the reporting period.

Depreciation of investments associated with discovery and production of proven and developed gas reserves is based on the depletion method, in other words, in each accounting period the assets are depreciated at a rate determined by the number of units of gas actually produced, divided by the proven and developed gas reserves remaining according to estimates. The estimated gas volume in producing reservoirs during the reporting period is calculated each year, inter alia, based on assessments of oil and gas reserves by external experts.

− Deferred tax assets

A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Management judgment is required to determine the amount of the deferred tax asset that can be recognized based on the timing, amount of expected taxable income and tax planning strategy. See additional information in section W below.

− Lawsuits

When assessing the possible outcomes of legal claims that were filed against the Company and its investees, the companies relied on the opinions of their legal counsel. The opinions of their legal counsel are based on the best of their professional judgment, and take into consideration the current stage of the proceedings and the legal experience accumulated with respect to the various matters. As the outcomes of the claims are determined by the courts, these outcomes could differ from the assessments.

− Fair value of an unmarketable financial instrument

Under IFRS 7, the fair value of an unmarketable financial asset classified at level 3 on the fair value hierarchy is determined on the basis of the assessment method, usually by estimating the future cash flow discounted at the current discount rates for items with similar characteristics and terms of risks.

− Investment property

Investment property is presented at fair value on the reporting date with any changes therein recognized in profit or loss. The fair value is determined by an external, independent appraiser based on the estimated value, including the use of valuation techniques and assumptions regarding the estimated future cash flows expected from the asset and the estimated discounted value appropriate to these cash flows. Fair value is sometimes determined in relation to recent transactions in real estate with similar nature and in a similar location to the assessed property. See additional information in section Q below.

C-22 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

C. Consolidated financial statements

The consolidated financial statements include the statements of companies over which the Company exercises control (subsidiaries). Control is exercised when the Company is able, directly or indirectly, to establish the financial and operational policy of the controlled company. When assessing control, the effect of potential voting rights on the date of the balance sheet is taken into account. The financial statements are consolidated from the date that control is achieved until such time as control ceases.

Material mutual balances and transactions and profits or losses arising from transactions between the Group companies have been eliminated in full in the consolidated financial statements.

In the consolidated financial statements, the Group eliminates the revaluation to market value of securities of Group companies (shares of the Company and subsidiaries and debentures issued by Group companies), which was carried out by special purpose companies that issue and manage exchange traded funds and by profit-sharing policies of insurance companies, and account for these holdings in accordance with generally accepted accounting principles for the acquisition (sale) of treasury shares, acquisition (sale) of other shares of subsidiaries and joint holding of debentures. It is noted that securities of Group affiliates held by special purpose companies are presented in the Group’s consolidated financial statements at their fair value (as presented in the financial statements of the special purpose companies).

The non-controlling interests represent the share in the profit or loss of the subsidiaries and in the net assets at fair value on the acquisition date of the subsidiaries. These are presented as shareholders’ equity in a separate amount.

Acquisition of non-controlling interests is entered against goodwill, which is calculated as the difference between the consideration paid and the amount of the acquired share of the non- controlling interest at the acquisition date. If there is a negative difference between consideration paid and the share of non-controlling interests, the difference is recognized in the statement of income as incurred. Upon the sale or issue of shares to the non-controlling interest, the difference between the consideration for the sale and the exercised equity value (including amounts deferred in other comprehensive income) is recognized in the statement of income. At the date of a business combination achieved in stages, the net identifiable assets acquired are revalued at fair value, and the difference between the fair value and the equity value of the net identifiable assets is recognized in other comprehensive income.

The non-controlling interest in a subsidiary with a deficit in equity, shares the losses of the subsidiary up to amount of the loans and liabilities it provided (including accrued interest on these loans) and the liabilities for granting the loans.

The financial statements of the Company and its subsidiaries are prepared at the same dates and for the same periods. The accounting policy in the financial statements of the subsidiaries is applied uniformly and consistently with the accounting policy in the Company’s financial statements.

Jointly controlled operations

A joint transaction is a contractual arrangement whereby the parties to it (the participants) take upon themselves joint economic activity. The transactions themselves have no rights in assets, and do not make undertaking in any engagements in the name of the participants. The financial statements include the part of the Group in assets and liabilities of the joint operation, and the Group's share in connection with the joint operation and its share in the revenue of the joint operation.

C-23 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

D. Functional currency and foreign currency

1. Functional currency and presentation currency

The financial statements are presented in new Israeli shekels, which is the functional currency of the Company.

The functional currency, which is the currency that most effectively reflects the financial environment in which the Company operates, is determined separately for each company in the Group, including investees and jointly-owned companies accounted for by the equity method, and this is the currency used to assess the company’s financial situation and results of its operations. When the functional currency of a company in the Group is not the same as the reporting currency, this company constitutes a foreign operation and the information in its financial reports is translated before inclusion in the consolidated financial statements, as follows:

a) The assets and liabilities as of every balance sheet date (including comparative information) are translated according to the closing rate at every balance sheet date. b) The income and expenses for all periods reported in the statement of income (including comparative information) are translated according to the average currency exchange rates in all the reported periods. However, when there are material fluctuations in exchange rates, the income and expenses are translated according to the exchange rate on the date of the actual transactions. c) Equity, capital reserves and other capital movements are translated according to the exchange rate as incurred. d) Any translation differences that were generated are recognized in other comprehensive income (capital reserve arising from translation of the financial statements of foreign operations).

When a foreign operation is disposed of, in part or in full, the relevant amount in the foreign currency translation reserve (FCTR) is transferred to profit or loss. Loans between companies in the Group, which are not intended for repayment and are not expected to mature in the foreseeable future, and therefore constitute a part of the investment in a foreign operation, are accounted for as part of the investment. The exchange rate differences deriving from these loans (before tax) are recognized in the same item as the other comprehensive income, as described in section (D) above.

Foreign currency differences for a loan in foreign currency designated as a hedge of a net investment in a foreign operation (before tax) are recognized in equity, as described in section D above. When the net investment is disposed of, these translation differences are recognized in profit or loss.

2. Transactions, assets and liabilities in foreign currency

Transactions in foreign currency are accounted on first recognition at the exchange rate on the dates of the transactions. Subsequent to initial recognition, monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rate on the reporting date. Exchange rate differences are recognized in profit or loss. Non- monetary assets and liabilities are stated at translated cost at the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies and measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined.

3. CPI-linked financial instruments

Assets and liabilities linked to the consumer price index in Israel (CPI) are adjusted according to the relevant index, at each reporting period, according to the provisions in the agreement. Linkage differences deriving from this adjustment are recognized in profit or loss.

C-24 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

E. Operational turnover period

The regular operational turnover of the Company does not exceed one year, therefore, the current assets and current liabilities include items that are planned and expected to be realized within the period of the regular operational cycle of the Company (until the distribution of the shares of Delek Real Estate as a dividend in kind, the operating cycle for construction of apartments was three years).

F. Cash equivalents

The Company considers all highly liquid investments, including short-term deposits, with original maturities of three months or less from the date of investment, which are not pledged, to be cash equivalents.

G. Cash and cash equivalents for performance-based contracts

Cash and cash equivalents for performance-based contracts include cash overlapping liabilities for performance-based life assurance policies. Insurance regulations in Israel restrict the use of these funds.

H. Short-term deposits

Short-term deposits are deposits with original maturities exceeding three months from the date of investment. The deposits are recognized according to the terms of their deposit.

I. Provision for doubtful debts

1. The provision for doubtful debts is calculated specifically for debts which, in the opinion of the Company’s management, are unlikely to be collected. In addition, the Group enters a provision for groups of customers that are estimated collectively for impairment based on the characteristics of their credit risk. Impaired receivables will be derecognized when it is determined that these debts are uncollectible.

2. a) Provisions in respect of premiums receivable in general insurance are calculated, inter alia, according to the extent of the arrears In respect of loans that are secured by mortgage over real estate assets and other loans, the provision was based on the extent of the arrears, plus a general provision, which reflect the assessment of the subsidiaries of the risks involved.

b) The subsidiaries set up provisions for doubtful debts in respect of reinsurers’ debts whose collection is doubtful on the basis of individual risk estimates. In addition, for determining the reinsurers' share in outstanding claims and in insurance reserves, the insurance subsidiaries take into account, among other things, an assessment of the likelihood of collection from the reinsurers, while the reinsurers’ share, as mentioned, is computed on an actuarial basis. The share of those reinsurers who are in financial difficulties is computed in accordance with the actuary’s estimation, which takes all the risk factors into account. When reinsurers are in difficulties, they may raise various arguments that relate to recognition of the debt. In such cases, the insurance subsidiaries take into account, when preparing the provisions, the reinsurers’ willingness to make cut off agreements.

C-25 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

J. Inventory

Inventory is stated at the lower of cost or net realizable value. The cost of inventory includes all the costs of purchase, conversion and other costs incurred in bringing items to their present location and condition. Net realizable value is the estimated selling price during the regular course of business less the estimated completion costs and costs required to effect the sale.

Inventory cost is primarily determined as follows

Fuels and consumer goods - Cost of fuels in the operating inventory is based on the quarterly weighted average. Cost of consumer goods in the inventory is based on the retail method

Inventory in refineries - Cost of crude oil is based on the quarterly weighted average. The cost of distillates includes production expenses

Vehicles - Based on specific cost

Others - Based mainly on moving average

The Company periodically assesses the state and age of its inventory and makes provisions for slow moving stock accordingly.

When production output is irregular, the inventory cost does not include additional fixed overhead costs beyond those required for regular production. Such costs will be charged as an expense in the statement of income for the period in which they were incurred. In addition, the cost of inventory will not include irregular amounts for cost of materials, labor and other costs stemming from inefficiency.

K. Financial instruments

According to IAS 39, financial instruments are recognized at the date of initial recognition at fair value with directly attributable transaction costs, with the exception of investments recorded at fair value with changes in the statement of income and for which transaction costs are recognized in profit or loss.

1. Financial assets measured at fair value through profit or loss

The Group has financial assets measured at fair value through profit and loss that include financial assets that are held for trading and any financial asset that is designated on initial recognition as one to be measured at fair value with fair value changes in profit or loss.

Financial assets are classified as held for trading if they are acquired principally for the purpose of being sold in the near term, if they form part of a portfolio of identifiable financial instruments that are jointly managed to earn short-term profits, or if they are a derivative not held for hedging purposes. Profits or losses from held-for-trading investments are charged to the statement of income at the date they are incurred.

Embedded derivatives are separated from the host contract and accounted for separately if: (a) the economic characteristics and risks of the host contract are not closely related to those of the embedded contract; (b) a separate instrument with the same terms as the embedded derivative would meet the definition of the derivative; (c) the hybrid instrument is not measured at fair value through profit and loss.

Derivatives, including embedded derivatives that were separated, are classified as held for trading unless they are intended for use as instruments for effective hedging.

The Group is assessing the existence of an embedded derivative and the need to separate it on the date it first becomes a party to the contract. An embedded derivative is only reassessed when there is a change in the contract that has a significant effect on the cash flows from the contract.

C-26 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

K. Financial instruments (contd.)

2. Loans and borrowings

The Group has loans and borrowings that are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial recognition, loans and borrowings are measured at amortized cost by the effective interest method.

3. Available-for-sale financial assets

Subsequent to initial recognition, available-for-sale financial assets are measured at fair value. Profit or loss as a result of fair value changes, with the exception of exchange rate differences attributable to financial debt instruments recognized in profit or loss under financing, are recognized in other comprehensive income. At the date of derecognition of the investment or in the event of objective evidence of impairment, the cumulative profit or loss that was recognized in other comprehensive income is charged to the statement of income. Interest income or expenses on investments in debt securities are recognized in profit or loss according to the effective interest method. Dividends received for investments in equity instruments are recognized in profit or loss on the date of the right to receive them. If it is not possible to estimate the fair value of the investment in equity instruments that do not have a quoted market price, the investments are measured on a cost basis.

4. Fair value

The fair value of the investments traded on an active market is determined by the market prices at the reporting date. For investments that do not have an active market, the fair value is determined by using the evaluation method. These methods are based on transactions recently made in market conditions, reference to the present market value of another similar instrument, discounted cash flows or other evaluation methods.

5. Financial liabilities at amortized cost

Interest-bearing loans, debentures, structured bonds and credit are first recognized at fair value less directly attributable transaction costs. Subsequent to initial recognition, interest-bearing loans, debentures and credit are recognized at amortized cost, using the effective interest rate.

6. Financial liabilities measured at fair value through profit and loss

Financial liabilities measured at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated on initial recognition as one to be measured at fair value with changes recognized in profit or loss.

Liabilities for a short sale of securities are classified as financial liabilities measured at fair value through profit and loss.

Derivatives, including embedded derivatives that were separated, are classified as held for trading unless they are intended for use as instruments for effective hedging. If a contract contains one or more embedded derivative, the full hybrid instrument could be designated at the date of initial recognition only as a financial asset measured at fair value through profit or loss.

C-27 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

K. Financial instruments (contd.)

7. Compound financial instruments

Convertible debentures issued in currency other than the Company’s functional currency, or convertible debentures linked to the CPI, contain two components: the convertible component and the debt component, while the convertible component is also classified as a liability. The conversion component is first calculated at the recognition date as a financial derivative at fair value and the difference between the consideration received for the convertible debentures and the fair value of the conversion component is recognized as the debt component. Direct transactions costs are allocated relative to each component with the amount allocated to the debt conversion component is recognized in profit or loss as incurred.

Subsequent to initial recognition, the conversion component is accounted for as a financial derivative and is recorded at its fair value at every balance sheet date. Subsequent to initial recognition, the debt component is accounted for as financial liabilities, as described above.

8. Issue of a block of securities

Upon the issuance of securities in a package, the gross consideration received is allocated to the component securities issued in the package according to the following allocation order: Fair value is first determined for financial instruments stated at fair value in each period, Subsequently, fair value is determined for the financial liabilities and compound instruments (such as convertible debentures) that are not recorded at present value instead of fair value every period. The allocated proceeds for equity instruments are determined at residual value. The allocation of the consideration for components of a block of the same grade is calculated according to fair value. Issuance costs are allocated for every component according to the proportional amounts determined for each component as abovementioned, net of the tax effect, if any, for equity instruments.

9. Derecognition of financial instruments

Financial assets

A financial asset is derecognized when the validity of the contractual rights to receive cash flows from the financial asset expires or the company transfer its contractual rights to receive the cash flows from the financial assets or took upon itself the obligation to pay the cash flows received in full to a third party without any substantive delay and also substantially transferred all the rights and benefits inherent in the asset or did not transfer and did not substantially maintain all the risks and benefits inherent in the asset but transferred control over the asset.

A factoring transaction and customer credit slips are treated as derecognition when the aforementioned conditions exist.

When the company transfers its rights to receive cash flows from the asset and neither substantially transferred it nor maintained the risks and benefits inherent in the asset and did not transfer control of the asset, the new asset is recognized according to the degree to which the company has ongoing involvement in it. Continuing involvement in the form of a guarantee for the transferred asset is measured according to the lower of the original carrying amount of the asset and the maximum amount of the consideration that the Company could be required to repay.

C-28 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

K. Financial instruments (contd.)

9. Derecognition of financial instruments (contd.)

Financial liabilities

A financial liability is derecognized when the liability is removed, cancelled or expired.

When a financial liability is replaced by another liability towards the same party under terms that are materially different, or when material change is made in the existing liability terms, the replacement or change is accounted for as derecognition of the original liability and recognition of the new liability. The difference in the carrying amount of both these liabilities is recognized in the statement of income. If the replacement or change is not material, it is accounted for as a change of the original liability terms and no profit or loss is recognized from a replacement.

When determining whether an exchange transaction of a debt instrument constitutes material change, the Group takes into consideration quantitative and qualitative criteria, such as the exchange of a shekel debt instrument linked to a debt instrument at fixed interest.

10. Treasury shares

The Company’s shares held by the Company or a subsidiary (including by exchange-traded funds) are recognized at the cost offset by the Company’s equity. The profit or loss from acquisition, sale, issue or cancellation of treasury shares is recognized directly in equity.

11. Sales options granted to non-controlling shareholders

The Group sometimes grants put options to the non-controlling shareholders for part or all of their holdings in subsidiaries. Non-controlling interests are classified as financial liabilities on the day of allotment. The Group measures the liabilities for the put options according to the fair value of the liabilities at the time they are granted. Changes during subsequent periods are recognized to the income statement or goodwill, as applicable. If the option is exercised during subsequent periods, the proceeds from the exercise are accounted for as defrayal of the liabilities. Similarly, if the option expires, the expiry is accounted for as sale of the investment in the investee.

12. Liability for exchange-traded funds

The liability for exchange traded funds (ETF) is a compound financial instrument that includes a host contract and an embedded derivative (index to which the ETF is linked).

The host contract is recognized initially at fair value less transaction costs. In subsequent periods, the host contract is measured at amortized cost. Changes in the amortized cost of the host contract are recognized in profit or loss.

The embedded derivative with economic characteristics and risks that are not closely related to the economic characteristics and risks of the host contract is initially recognized at fair value and remeasured in subsequent periods at fair value. Changes in fair value are recognized in profit or loss as incurred.

Under IAS 39, the host contract and embedded derivative are accounted for separately and each is measured separately. IAS 39 does not require separate presentation of each of the components of the hybrid instrument.

In the Group’s opinion, presentation of the components of the ETF together is the most appropriate reflection of the economic character of the liability for ETF, since this presentation reflects (before accounting of the issuance costs) the amount that the Group could require for payment to ETF holders, which may be redeemed at any time.

C-29 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

K. Financial instruments (contd.)

13. The insurance subsidiary resolved to designate the assets as follows:

a) Assets in investment portfolios of policies participating in investment profits:

These assets, which include marketable and non-marketable financial instruments are recognized at fair value through profit or loss, for the following reasons: These are portfolios under management, separate and identified, whose statement at fair value significantly reduces an accounting distortion of financial asset-financial liability mismatch. Furthermore, the management is based on fair value and the portfolio's performance is measured at fair value, in accordance with a documented risk management strategy. The information about the financial instruments is reported to the management (the relevant investments committee) internally at fair value.

b) Non-marketable assets that are not included in investment portfolios of investments overlapping profit-sharing policies (nostro), that do not include embedded derivatives or do not constitute derivatives (including investment funds):

These assets, which include designated debentures (Hetz agreements), other non- marketable debentures, commercial certifications, and loans and debit balances payable, are classified as loans and other payables and recognized in the balance sheet as non- marketable debt assets. Non-marketable shares are classified as available-for-sale financial assets. .

(c) Marketable assets which are not included in investment portfolios overlapping profit-sharing policies that do not include embedded derivatives or do not constitute derivatives (including investment funds):

These assets are classified as financial instruments available for sale.

(d) Derivatives and financial instruments that include embedded derivatives requiring separation

These assets will be assigned to the group of fair value through profit and loss (excluding derivatives designated as effective hedging derivatives).

(e) Financial assets and liabilities of certain liability certificates

Marketable and non-marketable financial assets and liabilities of liability certificates included in a portfolio measured as a whole by the Company at fair value, are stated at fair value.

L. Impairment of financial assets

The Group assesses whether there is objective evidence of impairment of financial assets or a group of financial assets at every balance sheet date.

1. Financial assets recorded at amortized cost

When there is objective evidence of impairment on loans and receivables recorded at amortized cost, the amount of the loss recorded in the statement of income is measured as the difference between the asset’s carrying amount and the present value of its projected future cash flows (excluding future credit losses that have not been incurred), discounted at the original effective interest rate of the financial asset.

C-30 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

L. Impairment of financial assets (contd.)

2. Available-for-sale financial assets

When there is objective evidence of impairment, the amount of the loss is measured as the difference between the cost (less payment of principle and amortization) and the fair value, less the impairment recognized in the past to the statement of income.

When testing for impairment of available-for-sale financial assets that are equity instruments, the Group also examines the difference between the fair value of the asset and its original cost while taking into consideration changes in the fair value of the asset, for the time in which the fair value of the asset is lower than its original cost and changes in the technological, economic or legal environment or in the market environment in which the company issuing the instrument operates. Impairment is considered as material, usually when there is a decrease of 20% from the original cost and will be considered as continuous when the impairment is over one year. Debt instruments are tested specifically for each instrument for which there is impairment of over 20% from the balance of the investment, taking into account inputs for each entity issuing the debt instrument.

Loss from impairment is transferred from equity to the statement of income. In subsequent periods, reversal of the impairment for equity instruments is not recognized in the statement of income and is recognized instead in equity as other comprehensive income (loss). Reversal of the impairment loss for debt instruments is recognized in the statement of income if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognized in the statement of income.

M. Derivative financial instruments

The Group carries out contracts with derivative financial instruments such as forward exchange contracts and interest rate swap transactions (IRS) and transactions to fix gas prices and inventory prices to hedge against exposure to fluctuations in currency exchange rates, interest rates and changes in the purchase or selling prices of gas and inventory. These financial instruments are initially recognized at fair value. Subsequent to initial recognition, the financial derivatives are measured at fair value.

Profits or losses deriving from changes in the fair value of derivatives that are not used for hedging are immediately recognized in the statement of income.

The fair value of forward currency exchange contracts is based on the exchange rates for contracts with similar maturity dates. The fair value of IRS contracts and of transactions to fix gas and inventory prices are based on the market prices of similar instruments.

The fair value of non-negotiable financial instruments is determined using accepted valuation models.

At the beginning of the agreement, the group documented the type of hedging it chose to implement for accounting reporting and the risk management objectives and strategies for this hedging. Documentation included the identification of the hedging instrument, the hedged item or transaction, the nature of the hedged risk and how the Company assesses the actual efficiency of the hedging instrument, compared with the expectations from the hedging instrument to effectively hedge against the risk by offsetting the impact of the changes in fair value of cash flows. Hedging effectiveness is assessed routinely in each reporting period.

Hedging transactions that meet the criteria are accounted for as follows:

C-31 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

M. Derivative financial instruments (contd.)

Cash flow hedges The effective portion of the profit or loss from the hedged instrument is recognized directly in other comprehensive income while the non-effective portion is immediately recognized in the statement of income.

Amounts charged to other comprehensive income are transferred to the statement of income while the results of the hedging transactions are carried to the statement of income, for example, when the hedged income or expense is recognized in the statement of income or when the projected transaction occurs. When the hedged item is the cost of a non-monetary asset or liability, this cost also includes the attributed amounts that are recognized directly in other comprehensive income.

When a forecast transaction or firm commitment is not likely to occur, the amounts recognized in other comprehensive income are transferred to the statement of income. When the hedging instrument expires or is sold, discharged or exercised, or if its designation as a hedging instrument is cancelled, the amounts recognized in other comprehensive income remain in equity until the forecast transaction or firm commitment occurs.

N. Leases

Classification of a lease as a finance lease or an operating lease is based on the substance of the transaction. Classification is made at the inception of the lease according to IAS 17.

1. Finance lease

A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. The leased asset is measured at the commencement of the lease period at the lower of the fair value of the leased asset or the present value of the minimum lease payments. Liabilities for lease payments are stated at present value while the lease payments are allocated between the finance expense and the repayment of the liability for the lease using the effective interest method.

Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

2. Operating lease

A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incident to ownership.

Land that is not part of the investment property that is stated in fair value is accounted for a operating lease when the amount attributed to the discounted leased land is stated in the balance sheet as "an advance operating lease fees" and is recognized as an expense in the statement of income according to the straight line method over the leasing period, including the optional period of 49 years in some of the cases.

C-32 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

O. Business combinations and goodwill

Business combinations are accounted for by the acquisition method under IFRS 3. Under this method, the assets and liabilities of the acquired business are measured at their acquisition-date fair value and all non-controlling interests in the acquired entity are reported according to the share of the non-controlling interest in the net fair value of these items.

If the business combination is implemented in stages, each acquisition transaction is treated separately. Adjustments to fair value of the net identifiable assets, referring to previous holdings of the Group, are recognized directly in other comprehensive income.

Goodwill acquired as part of a business combination is first measured as the difference between the acquisition cost and the Group's share in the net fair value of the identifiable assets of the acquired business. Subsequent to initial recognition, goodwill is measured at cost less cumulative losses from impairment. Goodwill is not amortized systematically. To assess impairment, goodwill is allocated, as from the time of acquisition, to each of the cash generating units of the Group or groups of cash- generating units that will benefit from the synergy of the combination. For assessment of impairment of goodwill, see section U.

When divesting a cash generating unit, the difference between the consideration and the net assets with the cumulative translation differences are recognized in other comprehensive income and unamortized goodwill balances are recognized in the statement of income. Profit or loss from divesting part of the cash generating unit includes the share of goodwill measured according to the proportional share divested from the cash generating unit.

When the cost of a business combination includes adjustment to the acquisition cost that is dependent on a future event (contingent consideration), the adjustment will include the cost of the business combination if the adjustment is expected and can be reliably measured, with the exception of the effect of the time value, which will be recognized in the statement of income.

Acquisition of subsidiaries that are not business combinations

Under IFRS 3, when acquiring subsidiaries and operations that do not constitute a business as defined in IFRS 3, the consideration for the acquisition is only allocated between the recognized assets and liabilities of the acquiring company, according to the proportion of their fair value at the acquisition date and without attributing any amount to goodwill or deferred taxes, with the participation of the minority, if any, according to its share in the net fair value of these recognized assets at the acquisition date. When non-controlling interests in subsidiaries are acquired, the difference between the amount paid and the amount of the acquired share in the non-controlling interest at the acquisition date is attributed to assets and liabilities as aforesaid.

P. Equity-accounted investments

The equity method of accounting is used to record investment in an affiliate. Jointly-controlled entities are also accounted for by the equity method (investments in investees). Under the equity accounting method, the investment in investees is recorded at cost and is subsequently adjusted to reflect the Group’s share in the net assets, including the other comprehensive income (loss) of the investees.

Goodwill for acquisition of investees is first measured as the difference between the acquisition cost and the Group's share in the net fair value of the identifiable assets of the investee. If the difference is negative, the amount is recognized in the statement of income as profit from negative goodwill. Subsequent to initial recognition, goodwill is measured at cost and is not amortized systematically. Goodwill is assessed to assess impairment as part of investment in an investee. If additional shares are acquired in an investee, and these additional shares do not confer control, the Group calculates the excess cost separately for each level.

C-33 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

P. Equity-accounted investments (contd.)

The statement of income reflects the share in the results of the investee’s operation. Profit and loss from transactions between the Group and the investee are cancelled according to the rate of holding in the investee.

When the Group’s share of losses in an investee exceeds its interest in an equity-accounted entity, the amount of the investment is reduced to nil and recognition of further losses is discontinued, except to the extent that the Group has a legal or constructive obligation to support the investee or has made payments on its behalf

The financial statements of the Company and its investees are prepared at the same dates and for the same periods or with a time difference that does not exceed three months if the statements of the investees are not available. The accounting policy used to prepare the financial statements of investees is applied uniformly and consistently with the accounting policy in the Company’s financial statements.

The Group uses the equity method until the point that is no longer has a material effect on the investee or when it is classified as an investment available for sale, whichever is earlier

Q. Investment property

Investment property is property (land or buildings, or both) held by the owner (by a lessor in operational leasing) or by a tenant in finance leasing to generate revenues from rent or for increase of capital value or both, and not for the production or supply of goods or services or for administrative purposes, or for sale in the course of regular business.

Land rights held by the lessor (the Group) in operating lease from the Israel Land Administration are classified as investment property at fair value.

Investment property is initially measured at cost, including directly attributed purchase costs. After the initial lease, the investment property is measured at fair value that reflects the market conditions at the balance sheet date. Gains or losses from fluctuations in the fair value of the investment property are recognized in the statement of income when they are incurred under the "increased investment property value" item. Investment property is not depreciated systematically.

To determine the fair value of investment property, the Group uses the value estimated by independent external assessors who are experts in estimating the value of property and have the required knowledge and experience.

R. Property, plant and equipment

Property, plant and equipment are recorded at cost with the addition of direct purchase costs, less cumulative depreciation and impairment losses and do not include expenses for ongoing maintenance. The cost includes spare parts and accessories that can only be used in the context of machines and equipment.

The cost of self-constructed assets includes the cost of materials, direct labor and financing costs as well as additional cost that can attributed directly to bringing the asset to the position and situation whereby it can operated according to the management’s intentions, and the costs of dismantling and removing the items and restoring the site on which they are located (see below).

C-34 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

R. Property, plant and equipment (contd.)

Depreciation is calculated in equal annual installments, according to the straight-line method, over the useful life of the asset, as follows

% Main %

Buildings 2-10 2.5 Machines, facilities and equipment 2.5-15 10 Vehicles 15-20 Office equipment and furniture 6-33 Leasehold improvements Throughout the rental period, including the option periods for agreements whereby it is expected that the option will be exercised, or throughout the life of the improvements, whichever is lower.

The cost of property, plant and equipment (primarily for gas exploration and oil refineries) includes the initial estimate of the cost of dismantling and removing the item and restoring the site on which it is located, for which the Company was made liable when the item was purchased or as a result of the use of the item during a particular period. The liability is first measured at fair value and changes in the liabilities deriving from time are recognized in the statement of income. The residual value and the length of the useful life of each asset is reviewed at least at each year-end and changes are treated prospectively as a change in an accounting estimate. See section U below for further details of impairment of property, plant and equipment.

The Group recognizes the costs of periodic maintenance on a fixed asset item (particularly refinery facilities) as part of the carrying amount of a fixed asset item, as incurred, when it is expected that there will be an inflow of financial benefits to the Group, and the cost of the items can be measured reliably. These costs are amortized over the period until the next service (approximately four years). Ongoing maintenance costs are recognized in the statement of income as incurred.

The depreciation of assets is discontinued when the asset is classified as being held for sale or when it is derecognized, whichever is the earlier. An asset is derecognized at the date of sale or when no further financial benefits from the use of the asset are expected.

S. Borrowing costs for qualifying assets

A qualifying asset is an asset that takes a substantial period of time to prepare for its intended use or sale. This includes property, plant, and equipment and investment property and inventory requiring a substantial period to prepare it for sale.

The Group capitalizes borrowing costs to qualifying assets.

Borrowing costs are capitalized to qualifying assets throughout the period required for completion and construction until they are ready for their intended use or sale. The amount of the capitalized borrowing costs in the reporting period does not exceed the borrowing costs incurred in the same reporting period.

In the framework of borrowing costs that are qualified for capitalization, the Group includes the rate differences arising from credit in foreign currency, to the extent that this is considered as adjustment to the interest costs.

The capitalization of borrowing costs is deferred during long periods when development is discontinued.

C-35 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

T. Intangible assets

Intangible assets that are purchased separately are measured on initial recognition at cost with the addition of direct purchase costs. Intangible assets purchased in a business combination are reported at fair value at the time of purchase. Subsequent to initial recognition, intangible assets are reported at cost less accrued depreciation and impairment losses. Costs for intangible assets that are depreciated internally, with the exception of capitalized development costs, are recognized in the statement of income when incurred.

In the opinion of the management, intangible assets have a defined useful life. The assets are depreciated over their useful life and impairment is assessed when there are signs of impairment in an intangible asset. The depreciation period and method for an intangible asset with a defined useful life are assessed at least once a year. Changes in the useful life are accounted for prospectively as a change in an accounting estimate. The amortization expenses for defined intangible assets with useful lives are recognized in the statement of income.

The length of the useful life of the intangible assets is as follows:

years

Marketing rights and customer relations 10-15 Software 3-10 Brands and trademarks 4-8 Franchises 15 Value of insurance portfolios 5-14 Non-competition agreements 5-13 Commission portfolios 2-10

U. Impairment of non-financial assets

The Group is examining the need to assess impairment of the carrying amount of non-financial assets when there are signs resulting from events or changes in circumstances indicating that the carrying amount is not recoverable. When the carrying amount of the non-financial assets exceeds their recoverable amount, the assets are depreciated to their recoverable value. The recoverable value is the higher of the net selling price and its value in use. When estimating the value of use, the expected cash flows are capitalized according to the discounted rate before tax that reflects the specific risks for each asset. For an asset that does not generate independent cash flows, the recoverable amount is determined for the cash generating unit to which the asset belongs.

When assessing the impairment of fuel stations operated by a subsidiary in Israel, these stations are considered as a single cash generating unit, inter alia, due to the common customer base and the business inter-dependency of the various stations. Nevertheless, in cases where the subsidiary's management is of the opinion that certain stations do not contribute to the chain of fuel stations, each of these stations is considered as a separate cash generating unit. Other assets are each tested for impairment separately.

The following criteria are applied when assessing impairment of the following specific assets:

1. Goodwill

The Group assesses goodwill for impairment annually or more frequently if events or changes in circumstances indicate impairment.

Impairment is determined for goodwill by assessing the recoverable amount of a cash generating unit (or a group of cash generating units) to which the goodwill refers. When the recoverable amount of a cash generating unit (or a group of cash generating units) is lower than the carrying amount of a cash generating unit(or a group of cash generating units) to which goodwill is allocated, the impairment loss is recognized. Losses due to impairment of goodwill are not removed in subsequent periods.

C-36 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

Impairment of non-financial assets (contd.)

2. Equity-accounted investees

After implementing the equity accounting method, the Group determines whether it is necessary to recognize further loss for impairment of the investment in an investee. At every balance sheet date, the Group determines whether there is objective evidence of impairment in the investment in an investee. If this is required, the impairment loss is recognized in the amount of the difference between the recoverable amount of the investment in the investee and its carrying amount. The impairment loss is recognized in profit or loss under the Group's share in the profits (losses) of investees, net.

V. Results of oil and gas exploration and development of proved reserves

Oil and gas investments and exploration are stated by the “successful efforts” method, according to which:

1. Expenses incurred in the participation in geological and seismic analyses and surveys are recognized in the statement of income when they are incurred.

2. Investments in oil and gas drillings that are in the drilling stages, that were not yet proven to produce oil or gas and that are yet to be classified as being non-commercial, are presented in the balance sheet at cost.

3. Investments in oil and gas drillings that were proved to be dry and were abandoned, or that were classified as being non-commercial, or for which development programs were not set for the foreseeable future are fully amortized to the statement of income.

4. Expenses entailed in drillings that were proven to have viable gas or oil reserves are stated in the balance sheet at cost and amortized to the statement of income, based on the production volume relative to the total proven reserves for the said asset, as appraised by an expert.

5. Costs accrued for development of the proved reserves of the Yam Tethys joint venture were designed to provide options for the extraction, handling, collection and storage of gas. These costs, which include engineering planning, development drillings, and acquisition and establishment of production facilities and pipes for the delivery of the gas onshore, are stated in the balance sheet at cost and amortized to the statement of income based on the production volume relative to the total proved reserves for the asset, as appraised by an expert.

Expenses entailed in the purchase of rights to licenses, titles and preliminary permits for oil and gas drilling, including increasing the Group's share in joint ventures, are accounted for as aforesaid.

The identifiable excess cost on the equity value of companies, partnerships and joint ventures that own such reserves, is attributed to investment in reserves and amortized as stated above.

W. Income tax

Taxes on income in the statement of loss include current and deferred taxes. The tax results for current or deferred taxes are recognized in the statement of income, unless they refer to items recognized directly in equity or other comprehensive income. In these cases the impact of the tax is also recognized under equity or other comprehensive income.

1. Current taxes

The current tax liability is measured according to the tax rates and tax laws that are enacted or substantively enacted by balance-sheet date, as well as adjustments required in connection with the tax liability payable in respect to prior years.

C-37 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

W. Income tax (contd.)

2. Deferred taxes

Deferred taxes are recognized for temporary differences between the amounts included in the financial statements and the amounts recognized for tax purposes, except for a limited number of exceptions. Deferred tax balances are calculated according to the tax rates that are expected to apply, based on the tax laws in force at the balance sheet date.

The deferred taxes calculation does not take into account the taxes that will be incurred if investments in investees are realized, provided that the sale of these investments is not likely in the foreseeable future. In addition, deferred taxes incurred due to the distribution of earnings as dividends by investees were not taken into account, in cases when this dividend distribution does not entail an additional tax liability and due to the Group's policy to refrain from initiating dividend distributions that involve an additional tax liability.

Deferred tax assets and deferred tax liabilities are reported in the balance sheet as non-current assets and long-term liabilities, respectively. Deferred taxes are offset if there is a legal enforceable right that permits offsetting a current tax asset against a current tax liability and the deferred taxes refer to the same entity owing the tax to the same tax authority.

In cases where there is uncertainty with respect to the existence of taxable income in the future, deferred taxes are not recognized as an asset in the financial statements.

In cases where the Group holds companies with a single asset and it does not intend to realize either the shares in the asset companies or the asset itself, the Group recognizes the deferred taxes for timing differences according to the tax rate that applies to the sale of shares in the asset company.

X. Share-based payments

Employees of some of the Group companies are entitled to benefits in the form of share-based payment, in consideration for capital instruments (hereinafter: equity settlements) and for cash- settlements (hereinafter: cash-settlements).

Equity-settled transactions

The cost of equity-settled transactions with employees is measured according to the fair value on the date of grant of the equity instruments granted. The fair value is determined using an accepted pricing model.

The cost of equity settlements is recognized in the statement of income with a corresponding increase in equity over the period during which the implementation and/or service terms apply, and end on the date on which the relevant employees become entitled to compensation (hereinafter: the vesting period). The accrued expense recognized for equity-settlements in each reported period until the vesting date reflects the progress of the vesting period and the Group's best estimate of the number of equity instruments that will eventually vest.

If the Group amends the conditions for the equity settlement, an additional expense is added to the original calculated expense. An additional expense is recognized for any amendment that increases the overall fair value of the share-based payment or that benefits the employee at the fair value on the amendment date.

Cancellation of an equity-settled grant is treated as if it had vested on the cancellation date and the expenses that have not yet been recognized in respect to the grant are immediately recognized. However, if the cancelled settlement is replaced with a new settlement and is designated as a replacement settlement at the settlement date, the cancelled settlement and the new settlement are both accounted for as an amendment of the original settlement, as described in the previous paragraph.

C-38 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

X. Share-based payments (contd.)

Cash settlements

The cost of a cash-settlement is measured at its fair value on the grant date. The fair value is determined using an accepted pricing model The fair value is recognized as an expense over the period until vesting, and a corresponding liability is also recognized. The liability is remeasured at each balance sheet date at fair value until its settlement date, and any changes in fair value are recognized in the statement of income.

Y. Employee benefit liabilities

The Group has a number of severance benefit plans:

1. Short-term employee benefits

Short-term employee benefits include salaries, vacation days, sickness, convalescence and national insurance contributions and are recognized as an expense as the services are provided. A liability is recognized for the amount expected to be paid under short-term or profit- sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

2. Post-employment benefits

The plan is usually financed by deposits with insurance companies and are classified as defined deposit plans and defined benefit plans.

The Group has a defined contribution plan, in accordance with Section 14 of the Severance Pay Law, pursuant to which the Group makes regular contributions, without it having any legal or constructive obligation to make additional payments, even if the principal amounts that have accumulated are insufficient to pay all the benefits to the employee, which relate to the employee’s service in the current period and in past periods. Contributions to the defined contributions plan for severance or compensation are recognized as an expense at the time of their deposit in the plan, in parallel with the receipt of employment services from the employee, and no additional provision needs to be made in the accounts.

In addition, the Group companies have defined benefit plans for severance pay under the Severance Pay Law. By law, employees are entitled to compensation if they are dismissed or when they retire. The liability for employee benefits is presented on the basis of the actuarial value of the projected unit credit. The actuarial calculation takes into account future payroll costs and the rate of employees leaving the company, based on the assessment of the payment timing. The amounts are presented on the basis of discounting the future projected cash flows, according to the interest rates of government debentures payable close to the liability period relating to severance.

The Company deposits amounts for its liabilities to pay compensation to some of its employees in pension funds and insurance companies (hereinafter: the plan assets).

Actuarial profits and losses are recognized in the statement of income as incurred.

The liability for employee benefits reported in the balance sheet represents the present value of the defined benefit liability less the fair value of the assets of the plan.

C-39 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

Revenues are recognized in the statement of income when they can be measured reliably. It is likely that there will be an inflow of financial benefits to the Company, and the costs that were or will be generated from the transaction can be measured reliably. The revenues are measured at the fair value of the consideration less commercial discounts, bulk discounts and returns.

Specific instructions for recognition of the Group's revenues required for recognition of the revenue are described below:

1. Revenue from the sale of goods

Revenue from the sale of goods is recognized once all the significant risks and returns arising from ownership of the goods have been assigned to the buyer, and the seller no longer maintains the continuing management involvement. The transfer date is usually the date that ownership is transferred.

2. Revenue from the sale of apartments

Revenue from the sale of apartments is recognized once all the significant risks and benefits arising from ownership have been assigned to the buyer. Revenues are only recognized at the date when there is no significant uncertainty regarding collection of the consideration from the transaction, the related costs are known, and there is no continuing managerial involvement in relation to the apartments that were sold. This usually occurs when a significant part of the building is completed, transfer of the apartment to the buyer and full payment of the consideration by the buyer.

3. Revenue from rent

Revenue from rent is recognized according to the straight line method over the rental period. Revenue from rent that demonstrates a steady increase in rental fees over the contract period is recognized according to the straight line method provided there is certainty as to the collection of differences in rental fees in the future.

4. Revenue from production of fuels, storage and rental of tankers is recognized in the statement of income when the service is provided, over the service period.

5. Revenue from providing services (including management fees)

Revenue from providing services is recognized according to the stage of completion on the reporting date. According to this method, revenue is recognized during the reporting period in which the services were provided. If the results of a contract cannot be reliably measured, the revenue is recognized only if the expenses incurred can be returned.

6. Interest income

Interest income is recognized on a cumulative basis using the effective interest method.

7. Revenue from royalties

Revenue from royalties is recognized on an cumulative basis, according to the nature and terms of the agreement.

8. Revenue from dividends

Dividends from investments that are not accounted using the equity method are recognized at the record date.

C-40 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

Z. Recognition of revenue (contd.)

9. Reporting of gross or net revenues

Where the Group acts as an agent or intermediary without bearing the risks and rewards deriving from the transaction, its revenue is recognized on a net basis. However, where the Group acts as a principal supplier and bears the risks or benefits from the returns resulting from the transaction, revenues are recognized on a gross basis.

10. Income from insurance businesses

a) Premiums

1. Premiums in life assurance and health insurance, including savings premiums and with the exception of intakes in respect of investment contracts, are recognized as revenues at the date of their collection. Cancellations are recorded when the notification is received from the policyholder or when initiated by the insurance subsidiaries due to arrears in payments, all according to the policy terms and subject to legal provisions. Participation in profits of a policyholders net of the premium

2. General insurance premiums are accounted for as income based on periodic reports. Insurance premiums usually refer to an insurance period of one year.

In the motor vehicle property branch of insurance in Israel, the insurance comes into effect only after payment of the insurance premium, therefore the premium is accounted for on the date of payment. Insurance premiums in respect of policies that come into effect after balance sheet date or premiums in respect of policies for a period exceeding one year are recorded as a prepaid premium. Some of the premiums in Israel, primarily in the motor, property, and apartment branches, include automatic renewals of policies due for renewal. Income included in the financial statements is after cancellations requested by policyholders and after cancellations and provisions due to non-payment of the premiums, subject to the law.

b) Management fees and commissions

1. Management fees for performance-based insurance contracts

Management fees include the following components: For policies sold as of 1 January 2004 – fixed management fees only For policies sold until December 31, 2003 – fixed and variable management fees

The management fees are computed in accordance with the Supervisor's directives on the basis of the yield and the accumulated saving of the policyholders in the profit- participating portfolio.

The fixed management fees are computed at fixed percentages of the accumulated saving and are recorded on a cumulative basis.

The variable management fees are computed as a percentage of the annual real profit (from January 1 to December 31) attributed to the policy, less the fixed management fees collected from that policy. Only positive variable management fees can be collected, and net of negative amounts accumulated in the preceding years.

C-41 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

Z. Recognition of revenue (contd.)

10. Income from insurance businesses (contd.)

b) Management fees and commissions (contd.)

1. Management fees for performance-based insurance contracts (contd.)

During the year, the variable management fees are recorded on a cumulative basis in accordance with the real monthly yield if it is positive. In months when the real yield is negative, the variable management fees are reduced to the amount of the cumulative variable management fees collected since the beginning of the year. Negative yield for which a reduction of the management fees was not made during a current year, will be deducted for the purpose of computing the management fees from the positive yield in the subsequent year.

2. Management fees of non-insurance subsidiaries

Income from the management of pension funds and provident funds is recognized on the basis of the receipts from the members.

Income from the management of provident funds and income from the management of customer portfolios are recognized on the basis of the managed asset balance. Income from general insurance commission in insurance agencies is recognized as incurred. Income from life assurance commissions are recognized on the basis of the date of payment of the commissions according to agreements with the insurance companies, less provisions for refunds of commissions due to expected cancellations of insurance policies.

3. Net profits (losses) from investments and other financing income.

Interest income is recognized on a cumulative basis using the effective interest method. Dividends from investments that are not accounted using the equity method are recognized at the record date. Income from investments includes the profits or losses realized in respect of available- for-sale financial assets. Profits and losses from the sale of investments are calculated as the difference between the proceeds from the sale, net, and the original or amortized cost and are recognized at the time of the sale. Income from investments includes profits or losses from revaluation of financial assets measured at fair value through the statement of income.

c) Recognition of revenue from underwriting and distribution and from brokerage fees

1. Revenue from commission for underwriting and distribution is recognized when the issuance and distribution is carried out, after fulfillment of the terms in the agreement with the company and/or issuer.

2. Revenue from brokerage fees is recognized on completion of the transactions.

C-42 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

Z. Recognition of revenue (contd.)

11. Finance income and expense

Finance income includes interest income in respect of amounts invested (including available-for- sale financial assets ), income from dividends, gains from the sale of available-for-sale financial assets, changes in the fair value of financial assets stated at fair value through profit or loss, gains from exchange rate differences and gains from hedging instruments recognized in profit or loss. Interest income is recognized as incurred, using the effective interest method. Dividend income is recognized on the date that the Group’s right to receive payment is established If a dividend is received for marketable securities, the Group recognizes the income from the dividend on the date of record.

Changes in the fair value of financial assets measured at fair value through profit or loss include revenue from dividends and interest.

Financing expenses include interest expense on borrowings, changes for the time value for provisions, dividends paid on preference shares classified as liabilities, changes in the fair value of financial assets measured at fair value through profit or loss, impairment losses recognized on financial assets and losses from hedging instruments recognized in profit or loss. Borrowing costs, which are not discounted on qualifying assets, are recognized in profit or loss using the effective interest method.

Gains and losses from exchange rate differences are reported on a net basis.

12. Customer discounts

Customer discounts are recognized in the financial statements as granted and are charged to sales.

The discounts received from customers at the end of the year, and the customer did not undertake to meet certain goals, are included in the financial statements when the proportionate purchases with the discounts are made. Discounts from customers that are conditional on the customer’s meeting certain goals, such as meeting an annual volume of purchases (quantity or financial) and increase in the volume of purchases compared to prior periods, are included proportionally in the financial statements, according to the volume of the customer’s purchases from the suppliers in the reporting period, only when it is likely that the goals will be achieved and the amounts of the discounts can be estimated reasonably.

AA. Cost of income and discounts from suppliers

The cost of sales includes expenses for loss, storage and transportation of inventory up to the final sales point. In addition, the sales cost includes losses for inventory impairment and write-offs and provisions for slow-moving inventory.

Discounts are deducted from the cost of the purchases at the dates that the discount terms apply. Part of the discounts for a portion of the purchases added to closing inventory is attributed to inventory and the remaining portion reduces the cost of sale.

Discounts received from suppliers at the end of the year, for which the Group has no commitment to meet certain goals, are included in the financial statements when the proportionate purchases with the discounts are made.

Discounts from suppliers that are conditional on the Company’s meeting certain goals, such as meeting an annual volume of purchases (quantity or financial) and increase in the volume of purchases compared to prior periods, are included proportionally in the financial statements, according to the volume of the Group's purchases from the suppliers in the reporting, only when it is likely that the goals will be achieved and the amounts of the discounts can be estimated reasonably.

C-43 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

BB. Earnings (loss) per share

Earnings (loss) per share is calculated by dividing the net earnings (loss) attributed to the Company's shareholders by the weighted number of ordinary shares outstanding during the period. Basic earnings per share include only shares that actually existed during the period, while potential ordinary shares are included only in the calculation of the diluted earnings per share if they dilute the earnings per share from continuing operations. In addition, potential ordinary shares converted during the period are included in diluted earnings per share only until the conversion date and thereafter they are included in basic earnings per share. The Group's share in the profits of subsidiaries is calculated according to its share in the earnings per share of that subsidiary multiplied by the number of shares held by the Group.

CC. Provisions

A provision is recognized when the Group has a legal or constructive obligation as a result of a past event, and it is likely that financial resources will be required to settle the obligation and it can be estimated reliably. If the effect is material, the provisions are measured when capitalizing expected cash flow, using the pre-tax interest rate that reflects market expectations in respect of the time value of the cash, and in certain cases, the specific risks related to liabilities.

1. Environmental protection

Environmental liabilities represent an estimate of the costs entailed in examining and remedying the contaminations created. The provision is recorded when in the management's opinion it is likely that a liability has been created, the amount of which can be reasonably estimated. Environmental liabilities represent an estimate of the costs entailed in examining and remedying the contaminations created.

The management's assessment is based on in-house and independent estimates of the contaminations and the existing relevant remediation technology, and a review of applicable environmental regulations. Environmental liabilities accrue mostly no later than upon completion of the remedial review. The provision in respect of these liabilities is adjusted as additional information is obtained or the circumstances change. The costs of purchasing the equipment required for the current remediation of environmental hazards are recorded as property, plant and equipment.

2. Lawsuits

A provision for claims is recognized if, as a result of a past event, the Company has a present legal or constructive obligation and it is more likely than not that an outflow of economic benefits will be required to settle the obligation and the amount of obligation can be estimated reliably. When the value of time is material, the provision is measured at its present value. When assessing the need for recognition and quantification of the provisions, management is assisted by legal counsel.

3. Onerous contracts

A provision for an onerous contract is recognized when the economic benefits that the Group expects to receive from the contract are lower than the unavoidable costs as a result of compliance with contractual commitments. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing the contract. As described in Note 14 below, a subsidiary recognized a provision for an onerous contract for put and call options for the acquisition of a investee and constitutes a forward transaction to acquire control in an affiliate, and accordingly, is not subject to IAS 39.

4. Reorganization

A provision for structural changes is recognized when the Group has approved a detailed and formal reorganization plan, and the reorganization has either commenced or has been announced. The provision does not include future operational expenses.

C-44 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

DD. Advertising costs

Advertising costs are recognized in profit or loss as incurred.

EE. Assets held for sale and discontinued operations

An non-current asset or group of non-current assets is classified as held for sale when it is populated primarily through a sales transaction rather than long-term use. This condition is met when the asset is available for immediate sale in its current condition, there is a commitment by the Company to sell it, there is a plan to find a buyer and it is highly probable that the sale will be completed within one year of the classification. These assets are not depreciated from the time they are so classified and presented separately in the balance sheet, for the initial classification period only, according to the value in the financial statements or their fair value less the cost of sales, whichever is lower. At the same time, liabilities attributed to these assets are presented separately on the balance sheet, in a similar manner.

A discontinued operation is an operation that was sold or classified as held for sale, as described above, and represents a principle and distinct area of business or geographical area. In addition to classification on the balance sheet, as stated above, the results of the operation and cash flows attributed to the discontinued operation are presented separately in the statement of income and the statement of cash flows. This also applies to the comparative figures that are restated for this purpose, including those in the segment note.

Investment property stated at fair value and classified as an asset held for sale, as set out above, continues to be stated according to this model and is stated separately in the balance sheet, under assets held for sale.

FF Insurance contracts

IFRS 4 - Insurance Contracts allows the insurer to continue with its accounting policy for insurance contracts by deviating from implementation of IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors when determining accounting policy related to insurance contracts, with five exceptions. IAS 8 determines, inter alia, the accounting policy for a transaction or event for which there is no specific international standard or interpretation. In addition, IFRS 4 permits the use of non-consistent accounting policy for insurance contracts (and for any related deferred acquisition costs and intangible assets) of subsidiaries.

In this context, it is noted that the accounting policy in general insurance business, applied by insurance companies incorporated in Israel (partially set by the Supervisor of Insurance) is basically the same as that applied by insurance companies incorporated in other countries, with the exception of that stated in section (2) and (2) below and in Note 31(E).

1. Life assurance:

a) Recognition of income – see section Z (10) above.

b) Life assurance reserves

Life assurance reserves in Israel are computed according to the Supervisor’s directives (regulations and circulars), generally accepted accounting principles and accepted actuarial methods. The reserves are computed according to the relevant coverage data, such as the age of the policyholder, number of years of coverage, type of insurance and sum of insurance. Life assurance reserves and the reinsurers' share therein are determined on the basis of annual actuarial assessments carried out by the actuaries of the insurance subsidiaries.

C-45 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

FF Insurance contracts (contd.)

1. Life assurance: (contd.)

c) Life assurance reserves for policies subject to semi-annual linkage and the assets related to these reserves, are adjusted on a cumulative basis to the known index on the reporting date.

d) Directives of the Supervisor regarding reserves for annuities

A circular that was issued by the Supervisor in February 2007, regarding the method of calculating the reserves for annuities in life assurance policies, provides updated directives on how to calculate the provisions as a result of the improvement in life expectancy that requires monitoring the adequacy of the reserves in insurance policies that permit the receipt of an annuity, and their proper supplementation. Accordingly, the Company immediately supplements the reserve, to the extent necessary, with respect to policies in which annuities are currently being paid or when the policyholder has reached retirement age. Regarding other policies, where profits are expected, the reserve is supplemented alongside the receipt of the expected income, over the policy period.

e) Deferred acquisition costs

Deferred acquisition costs of life assurance policies (DAC) sold as from January 1, 1999 include commission for agents and acquisition supervisors and other expenses related to the acquisition of new policies, including part of the general and administrative expenses. The DAC is amortized at equal annual rates over the policy period but not more than 15 years. The DAC relating to cancelled policies are written off on the cancellation date. Deferred acquisition costs for policies that were issued up to December 31, 1998 are computed according to the “Zillmer deduction” method by the actuaries of the insurance subsidiaries, based on a percentage of the premium or of the amount at risk according to the various insurance programs. The amortization rate of Adif policies is 10% per annum and for Endowment policies, over the term of the policy.

f) Outstanding claims

Outstanding claims, net of the reinsurers’ share therein, are computed on an individual case basis, according to the valuation of insurance subsidiaries’ experts, based on the notifications regarding the insurance events and the sums insured. The provisions for long lasting payment claims with respect to disability insurance and long-term care (LTC) insurance, the direct and indirect expenses deriving from them, as well as the provisions for incurred but not yet reported claims (IBNR) are included under the insurance reserves.

g) Investment contracts

Intakes in respect of investment contracts are not included in the item of earned premiums but are directly recorded under liabilities in respect of life assurance and investment contracts. Surrenders and maturities of these policies are not included in the statement of income but are deducted directly from liabilities for insurance contracts and investment contracts.

In respect of these contracts, investment revenue, management fees collected from the policyholders, change in the reserve in respect of the share of the reinsurers in investment revenue, commissions to agents, and general and administrative expenses are recognized in the statement of income.

h) Provision for participation in earnings of policyholders in group insurance

The provision is recognized under other payables. In addition, the change in the provision is offset by the income from the premium.

C-46 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

FF Insurance contracts (contd.)

2. General insurance

a) Recognition of income – see section Z (10) above.

b) Payments and changes in liabilities in respect of insurance contracts include, inter alia, settlement and direct handling costs of claims paid and outstanding claims that occurred during the reported period, as well as an adjustment of the provision for outstanding claims and their direct handling costs that were recorded in previous years.

c) Provisions for outstanding claims include provisions for indirect expenses to settle claims

d) Liabilities for insurance contracts and deferred acquisition expenses

e) The reserve for unexpired risks is recognized under liabilities in respect of insurance contracts and is composed as follows:

1. An unearned premium reserve, which is not calculated on an actuarial basis and does not depend on any assumptions This reserve reflects the insurance premiums in respect of the insurance period after the balance sheet date and is calculated on a daily basis.

2. The reserve includes, when necessary, a provision in respect of the anticipated loss (premium deficiency), which is computed on the basis of an actuarial valuation.

The reserve for unexpired risks and outstanding claims for insurance in Israel, included in liabilities for insurance contracts, and the reinsurers’ share in the reserve and in the outstanding claims under reinsurance assets, and the deferred acquisition costs in general insurance, are computed in accordance with the Supervision of Insurance Business Regulations (Methods of Calculating Provisions for Future Claims in General Insurance) 5764-1984, as amended, the Supervisor’s directives in this respect and generally accepted actuarial methods for computing outstanding claims, according to the actuaries’ discretion.

f) Outstanding claims

The outstanding claims in the financial statements are computed as follows:

1. Outstanding claims and the reinsurers’ share thereof are recorded based on an actuarial valuation, except for the branches detailed in section 2 below.

2. Excess of income over expenses

In insurance companies incorporated in Israel, for all businesses with long tail claims (branches in which it could be several years before the claim is settled), such as the liability and motor vehicle property branches, excess of income over expenses is calculated on a tri-annual cumulative basis. In the sales law guarantee branch excess of income over expenses is calculated on a five-year cumulative basis, and in the financial guarantees branch it is calculated according to the date of the end of the policy (the excess).

C-47 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

FF Insurance contracts (contd.)

2. General insurance (contd.)

f) Outstanding claims (contd.)

2. Excess of income over expenses (contd.)

The excess is comprised from premiums, acquisition costs, claims and part of the investment income at an annual rate of 3%, all net of the reinsurers’ share, for each insurance branch and the respective underwriting year. The excess accumulated until its release, from the beginning of the insurance, net of the unexpired risk reserve and net of outstanding claims calculated as aforesaid (hereinafter: the accrual), is included in the insurance reserves and outstanding claims item and any deficit is recognized as an expense.

In insurance companies incorporated in other countries, the above mentioned accumulation method is not applied. The insurance reserves are based on accepted actuarial methods.

g) Deferred acquisition costs

Deferred acquisition costs in general insurance include agents’ commissions and part of the general and administrative expenses related to the issuance of polices, in respect of the unearned insurance premiums on retention. The acquisition costs are calculated for each branch separately, on the basis of the actual rates of expenses or according to standard rates, as a percentage of the unearned premium, at the lower of the two.

h) The insurance premiums item includes all the amounts paid by the borrowers in connection with property insurance policies through a mortgage bank. The amounts paid to a mortgage bank for expenses are recognized under commissions.

i) Subrogation and remnants are taken into consideration in the data-base by which the actuarial valuations of the outstanding claims are calculated.

j) Participation in income in group insurance, recorded on the basis of valid agreements, is deducted from the premiums.

3. Health insurance

a) Recognition of income – see section Z (10) above.

b) Health insurance reserves

Life assurance reserves are computed according to the Supervisor’s directives (regulations and circulars), generally accepted accounting principles and accepted actuarial methods. The reserves are computed according to the relevant coverage data, such as the age of the policyholder, number of years of coverage, type of insurance and sum of insurance. Life assurance reserves and the reinsurers' share therein are determined on the basis of annual actuarial assessments.

c) Outstanding claims

The provisions for long lasting payment claims with respect to long-term care insurance, the direct and indirect expenses deriving from them, as well as the provisions for incurred but not yet reported claims (IBNR) are included under the insurance reserves.

C-48 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

FF Insurance contracts (contd.)

3. Health insurance (contd.0

d) Provision for participation in earnings of policyholders in group insurance

The provision is recognized under other payables. In addition, the change in the provision is offset by the income from the premium.

e) The reserve for unexpired risks is recognized under liabilities in respect of insurance contracts includes, when necessary, a provision in respect of the anticipated loss (premium deficiency), which is computed on the basis of an actuarial valuation.

f) Deferred acquisition costs

1) Deferred acquisition costs in health insurance include agents’ commissions and part of the general and administrative expenses related to the issuance of polices, in respect of the unearned insurance premiums on retention.

2) Deferred acquisition costs in health insurance include expenses for medical examinations, underwriting and marketing and administrative and general expenses. The deferred acquisition costs are amortized at equal rates over the period of the policy, but in no longer than six years Deferred acquisition costs relating to cancelled policies are written off on the cancellation date.

GG. Foreign currency exchange rates and linkage

1. Assets and liabilities in foreign currency, or linked to foreign currency, are included as per the valid representative exchange rate published by the Bank of Israel on the balance sheet date.

2. The CPI-linked assets and liabilities are included as per the appropriate CPI for each linked asset or liability.

Exchange rates of the Company's principal functional currencies and the CPI:

Euro USD representative representative December exchange rate exchange rate CPI NIS NIS (Points)

December 31, 2009 5.442 3.775 206.2 December 31, 2008 5.297 3.802 198.4 5.659 3.846 191.2 December 31, 2006 5.564 4.225 184.9

Rate of change in the year ended: % % %

December 31, 2009 2.7 (0.7) 3.9 December 31, 2008 (6.4) (1.1) 3.8 December 31, 2007 1.7 (9.0) 3.4

*) CPI at average basis 1993 = 100

C-49 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

HH. Disclosure of new IFRSs in the period prior to adoption

IFRS 3 (revised), Business Combinations and IAS 27 (revised), Consolidated and Separate Financial Statements

The revised IFRS 3 and IAS 17 (hereinafter: the standards) are effective for annual periods beginning on or after January 1, 2010. Early adoption of the both standards together is permitted for the annual period beginning on or after January 1, 2008.

The main changes expected following application of the standards are described below.

− The definition of a business was expanded to include operations and assets that are not managed as a business, provided the seller is able to operate it as a business. − Currently, IFRS 3 prescribes that goodwill, unlike the other identified assets and liabilities of the acquiring company, is to be measured as the excess of the acquisition cost over the acquiring company’s share in the fair value of the net identifiable assets, at the date of acquisition. Pursuant to the standards, a separate election may be made for each business combination transaction to measure the non-controlling interest, and the resulting goodwill, on the basis of its full fair value, or according to the proportionate share acquired at the fair value of the identifiable assets, net at the acquisition date. − Contingent consideration in business combinations is measured at fair value. changes in fair value of the contingent consideration, which do not constitute adjustments to cost of acquisition in the measuring period, are not recognized as goodwill adjustment. When the contingent consideration constitutes a liability, it is stated at fair value with changes in profit or loss. − Direct acquisition costs attributed to a business combination are recognized in profit or loss as incurred. The requirement to charge it as part of the business combination consideration cost is removed. − Subsequent recognition of a deferred tax asset for temporary differences that were acquired and do not comply with recognition requirements at the acquisition date, are recognized in profit or loss and not as adjusted goodwill. − A transaction with a minority, whether a sale or an acquisition, is accounted for as a capital transaction and therefore is not recognized in the statement of income or does not affect the amount of goodwill, respectively. − The losses of a subsidiary, even if they result in a deficit in the equity of the subsidiary, are allocated between the parent company and the non-controlling interests, even if the minority is not a guarantor or does not have a contractual liability to support the subsidiary or to make further investment. − At the date of the loss or achievement of control in a subsidiary, the balance of the holding, if any, is revalued at fair value against profit or loss from the sale. This fair value will serve as the basis for its cost for subsequent accounting.

The standards will be applied prospectively, as from January 1, 2010. The material effect on the financial statements is mainly for business combinations and transactions carried out as from 2010.

C-50 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

HH. Disclosure of new IFRSs in the period prior to adoption (contd.)

IFRS 9 - Financial Instruments

In November 2009, IFRS 9 – Financial Instruments was published, as the first step in the project to replace IAS 39 – Financial Instruments: Recognition and Measurement. IFRS 9 introduces new requirements for classifying and measuring financial assets, and is effective for all financial assets in the scope of IAS 39.

Under the standard, on initial recognition, all the financial assets (including hybrid instruments with a financial host contract) will be measured at fair value. In subsequent periods, a debt instrument that meets the following two conditions is measured at amortized cost:

− The objective of the entity’s business model is to hold the financial asset to collect the contractual cash flows. − The contractual terms of the financial asset give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal outstanding.

Subsequent measuring of all other debt instruments and financial assets will be at fair value.

Equity instruments are measured at fair value in subsequent periods with changes recognized in profit or loss or in other comprehensive income (loss), according to the accounting policy that the entity has elected to apply for each instrument. Equity instruments held for trading are measured at fair value through profit or loss. The election is irrevocable. However, if the company changes its business model to management of financial assets, the financial instruments affected by the change are reclassified in the business model to reflect this change. In all other instances, financial instruments are not reclassified.

The standard is effective commencing from January 1, 2013. Early adoption is permitted. Initial adoption is retrospective, with restatement of comparative information subject to the exemptions in the standard.

The Company is assessing the possible effect of the new standard, however at this stage, it is unable to estimate its impact, if any, on the financial statements.

IAS 1 – Presentation of Financial Statements

The amendment to IAS 1 provides guidelines for classification of liabilities as current or non-current in respect of convertible financial instruments. Under the amendment, liability conditions that allow the counterparty to require the entity to settle in shares at any time is not relevant to its classification as current or non-current. The standard is effective retrospectively for accounting periods commencing on or after January 1, 2010.

The Company estimates that the amendment is not expected to have a material effect on the financial statements.

C-51 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

HH. Disclosure of new IFRSs in the period prior to adoption (contd.)

IAS 17 – Leases

The amendment to IAS 17 provides guidelines for classification of leases of land and buildings. The amendment eliminates specific guidance regarding classification of leases of land. As a result, leases of land are no longer classified as an operating lease when the title is not expected to pass to the lessee at the end of the lease term. Classification of a lease as operating or finance is based on the general instructions in IAS 17 addressing classification, taking account of the fact land normally has an indefinite economic life.

The amendment is applied prospectively for financial statements commencing from January 1, 2009. Early adoption is permitted. For retrospective application, when adopting the amendment, classification of the land lease is reassessed based on the information available when signing the lease. If there is a change in classification of the lease, the instructions of IAS 17 are effective retrospectively from the date of the lease. If, however, information necessary to apply the amendment retrospectively is not available, the amendment can be applied prospectively based on the information available at the adoption date of the amendment, and the asset and liability related to a land lease that was reclassified as a finance are recognized at their fair values at that date. Any difference between the fair value of the asset and the fair value of the liability is recognized in retained earnings.

The Company estimates that the amendment is not expected to have a material effect on the results of its operations. The main effect on the consolidated financial statements will be classification of amounts included under expenses in advance for operating lease in property, plant and equipment.

Revised IAS 32 Financial Instruments: Presentation - Classification of Rights Issues

Under the amendment to IAS 32, rights, options or option warrants for the acquisition of a fixed amount of equity instruments of the entity, in consideration of a fixed amount in any currency, will be classified as equity instruments if such rights, options or option warrants are issued pro rata to all the shareholders in the same class of non-derivative equity instrument.

The Company estimates that the amendment is not expected to have a material effect on the financial statements.

IAS 36 – Impairment of Assets

The amendment to IAS 36 clarifies the unit of accounting for purposes of goodwill impairment testing. The amendment clarifies that the largest unit permitted for allocating goodwill acquired in a business combination is the operating segment, as defined in IFRS 8 before aggregation for reporting purposes. The amendment is applied prospectively for accounting periods commencing on January 1, 2010. Early application is permitted.

The Company estimates that the amendment is not expected to have a material effect on the financial statements.

IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations

Under the amendment to IFRS 5, when the parent company decides on the disposal of part of its holdings in a subsidiary so that after the disposal the parent company is left with a non-controlling interest, for example rights that confer significant influence, all the assets and liabilities attributed to the subsidiary are classified as held for sale and the relevant guidelines of IFRS 5 apply, including presentation as a discontinued operation. In addition, another amendment clarifies the disclosure requirements for non-current assets (or disposal groups) classified as held for sale or discontinued operations. Under the amendment, the disclosures required in respect of non-current assets or disposal groups classified as held for sale or discontinued operations are only those set out in IFRS 5. The amendment is applied prospectively for accounting periods commencing on January 1, 2010. Early application is permitted. The Company estimates that the amendment is not expected to have a material effect on the financial statements.

C-52 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTD.)

HH. Disclosure of new IFRSs in the period prior to adoption (contd.)

IFRIC 17, Distributions of Non-cash Assets to Owners

IFRIC 17 (“the Interpretation”) provides guidelines for accounting of distribution of non-cash assets to owners, without controlling shareholders, including property, plant and equipment, a business as defined in IFRS 3 and ownership rights in another company. The Interpretation is effective from now onwards for the financial statements for periods commencing on January 1, 2010. Early adoption is permitted.

In accordance with the Interpretation, the obligation for the distribution is to be accounted for as when approved by the relative organ in the company. The liability will be measured at the fair value of the transferred asset, and will be recognized directly in equity, retained earnings. At each balance sheet date, until derecognition of the asset, the liability will be measured at the fair value of the asset, with changes recognized in retained earnings At the derecognition date, profit or loss is recognized in the statement of income in the amount of the difference between the amount of the liability and the balance of the asset in the financial statements at the derecognition date In addition, the scope of IFRS 5 was expanded to include distribution of non-cash assets to owners.

The Company estimates that the new interpretation is not expected to have a material effect on the financial statements.

IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments

IFRIC 19 (“the Interpretation”), which was published in November 2009, provides guideliens for the accounting treatment for transactions in which financial liabilities are extinguished by issuing equity instruments. In accordance with the Interpretation, equity instruments issued to extinguish a debt are measured at the fair value of the issued equity instrument, if it can be reliably measured. If the fair value of the issued equity instruments cannot be reliably measured, the equity instruments are measured according to the fair value of the extinguished financial liabilities at the date they were extinguished. Any difference between the balance in the financial statements of the extinguished financial liabilities and the fair value of the equity instruments that were issued is recognized in profit or loss.

The Interpretation is applicable for annual periods beginning on or after July 1, 2010 on a prospective basis. Early adoption is permitted.

The Company estimates that initial application of the new interpretation is not expected to have an effect on the financial statements.

C-53 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 3 – CASH AND CASH EQUIVALENTS

December 31 2009 2008 NIS millions A. Cash balances and deposits for immediate withdrawal

In NIS 675 362 In foreign currency 1,482 926

2,157 1,288 B. Short-term deposits

In NIS 1,526 163 In foreign currency 314 444

1,840 607

3,997 1,895

Short-term bank deposits in banks are for periods of between one week and three months. As at December 31, 2009, deposits bear interest of 1.15%.

NOTE 4 – PERFORMANCE-BASED CASH AND CASH EQUIVALENTS IN AN INSURANCE COMPANY

December 31 2009 2008 NIS millions

Cash balances and deposits for immediate withdrawal 123 80 Short-term deposits 980 525

Cash and cash equivalents 1,103 605

At December 31, 2009, deposits in banks bear current interest of 0.55% based on interest rates for daily deposits.

Short-term bank deposits in banks are for periods of between one week and three months. As of December 31, 2009, deposits bear interest of 1.60%.

C-54 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 5 – SHORT-TERM INVESTMENTS IN THE FINANCE SECTOR (MAINLY EXCHANGE TRADED FUNDS AND DEPOSITS)

December 31 2009 2008 NIS millions A. Financial assets measured at fair value through profit or loss (1)

Marketable securities 73 -

73 - Non-marketable securities Debentures 267 - Assets used as back-up assets in designated companies operating in issuance of exchange-traded funds and deposit 12,580 -

12,920 - B. Credit for acquisition of securities Open accounts 143 - Less - provision for doubtful debts (4) -

Trade receivables, net 139 -

C. Designated deposits (2) NIS 932 - In USD 1,014 - Other 1,151 -

3,097 -

16,156 -

(1) Financial assets at fair value through profit or loss, other than assets used as back-up assets in special purpose companies operating in issuance of exchange-traded funds and deposit, classified as held for trading and are recognized at fair value through profit or loss. Assets used as back-up assets in special purpose companies operating in issuance of exchange-traded funds and deposit are recognized by the Group at fair value in profit or loss

NOTE 6 – OTHER SHORT-TERM INVESTMENTS

December 31 2009 2008 NIS millions A. Financial assets measured at fair value in the statement of income

Shares 69 39 Government debentures 452 456

521 495

B. Bank deposits (1) 141 544

662 1,039

(1) At December 31, 2009, deposits bear interest of 0.73%. The balance at December 31, 2009, includes deposits of NIS 68 million (in 2008, NIS 393 million), restricted by the bank to the fulfillment of certain conditions. See Note 29 for the linkage conditions.

C-55 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 7 – TRADE RECEIVABLES

December 31 2009 2008 NIS millions

Open accounts 2,971 2,019 Checks receivable 789 683

3,760 2,702 Less - provision for doubtful debts 100 106

Trade receivables, net 3,660 2,596

See Note 29 for linkage conditions for customers.

Customer debts do not bear interest. The average credit for customers in Israel, Europe and the United States is 62, 14 and 12 days, respectively.

Changes in provision for doubtful debts:

NIS millions

Balance at January 1, 2008 97

Provision for the year 16 Recognition of doubtful debts write off (3) Adjustments for translation of financial statements of foreign operations 3 Classification of assets held for sale (7)

Balance at December 31, 2008 106

Provision for the year 5 Recognition of doubtful debts write off (10) Adjustments for translation of financial statements of foreign operations (1)

Balance at December 31, 2009 100

C-56 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 7 – TRADE RECEIVABLES (CONTD.)

Analysis of the gross trade receivables balance in accordance with the collection arrears period at the balance sheet date:

Trade receivables Trade receivables past due and collection in arrears not due (not Up to 90 91-180 181-270 271-365 Over 5 past due) days days days days years Total NIS millions

December 31, 2009 3,433 146 52 5 5 119 3,760

Less provision for doubtful debts 100

December 31, 2009 3,660

December 31, 2008 2,393 173 18 4 4 110 2,702

Less provision for doubtful debts 106

December 31, 2008 2,596

NOTE 8 – INSURANCE PREMIUM RECEIVABLES

A. Composition:

December 31 2009 2008 NIS millions

Premium due(b) 999 945 Less provision for doubtful debts 5 9

Total premium due 994 936

For linkage terms of premiums for collection, see Note 29.

B. Ageing:

December 31 2009 2008 NIS millions Unimpaired premium due Not past due 849 745 Past due *): Less than 90 days 108 117 90-180 days 12 29 More than 180 days 18 34

Total unimpaired premiums past due 138 180

Impaired premiums due 12 20 Less provision for doubtful debts 5 9

Total premium due 994 936

*) Including primarily debts past due in life assurance. These debts are largely backed up by the maturity value of the policy.

C-57 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 9 – OTHER RECEIVABLES

December 31 2009 2008 NIS millions

Advance expenses and advance trade payables 244 256 Current maturities of long-term debts and loans (1) 37 44 Interested parties – current balance 66 - Institutions 48 59 Dividends and profits to distribute and receive - 19 Deposits 1 100 Insurance companies and insurance agents 105 111 Excess deposits in customer loyalty 133 - Factoring transactions 1 64 Other receivables 237 369

872 1,022

(1) As of December 31, 2009, including current maturities of loans to affiliates in the amount of NIS 15 million (in 2008, NIS 30 million).

NOTE 10 –- INVENTORY

December 31 2009 2008 NIS millions

Fuel products in stations and facilities *) 470 377 Inventory of consumption goods in stations 152 154 Oil and distillates in the refinery *) 322 143 Vehicles and spare parts 619 1,182 Interim stock for sale - 523 Others 120 103

1,683 2,482

*) The balance of the inventory at December 31, 2008 is after amortization of the net sale of NIS 202 million.

C-58 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 11 – FINANCIAL INVESTMENTS OF INSURANCE COMPANIES

A. Composition:

December 31 2009 2008 NIS millions

Finance investments for performance-based contracts 16,155 12,056 Other finance investments 14,259 12,812

30,414 24,868

Finance investments for performance-based contracts

December 31 2009 2008 NIS millions

Marketable debt assets 6,452 3,881 Non-marketable debt assets 3,769 3,611 Shares 2,889 1,990 Other finance investments 3,045 2,574

16,155 12,056

Fair value of financial assets classified in accordance with IFRS 7

December 31, 2009 Level 1 Level 2 Level 3 Total NIS millions

Marketable debt assets 6,452 - - 6,452 Non-marketable debt assets - 3,612 157 3,769 Shares 2,812 - 77 2,889 Other 1,794 457 794 3,045

Total 11,058 4,069 1,028 16,155

C-59 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 11 – FINANCIAL INVESTMENTS OF INSURANCE COMPANIES (CONTD.)

A. Composition: (contd.)

Movements in level-3 financial assets measured at fair value

Financial assets measured at fair value through profit or loss Non- Other Marketable marketable finance debt assets debt assets Shares investments Total NIS millions

Balance at January 1, 2009 - 77 41 742 860 Total profit (loss) recognized - 45 (8) 9 46 Purchases - - 44 187 231 Sales - - - - - Redemptions - - - (125) (125) Transfer to level 3 - 35 - - 35 Transfer from level 3 - - - (19) (19)

Balance at December 31, 2009 - 157 77 794 1,028

Total gains (losses) for the period included in profit or loss for assets held as at December 31, 2009 - 45 (8) 25 62

Other finance investments

December 31, 2009 Stated at fair value available- through for-sale profit or financial Loans and loss assets borrowings Total NIS millions

Marketable debt assets (D) 43 5,778 - 5,821 Non-marketable debt assets - - 7,762 7,762 Shares (E) - 193 - 193 Other (F) 360 123 - 483

Total 403 6,094 7,762 14,259

C-60 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 11 – FINANCIAL INVESTMENTS IN INSURANCE COMPANIES (CONTD.)

December 31, 2008 Stated at fair value available- through for-sale profit or financial Loans and loss assets borrowings Total NIS millions

Marketable debt assets 33 4,294 - 4,327 Non-marketable debt assets 4 - 7,728 7,732 Shares - 105 - 105 Other 377 271 - 648

Total 414 4,670 7,728 12,812

B. Financial investments in insurance companies on the date of the balance sheet:

December 31 2009 2008 NIS millions

Current assets 2,097 1,995 Non-current assets 28,317 22,873

30,414 24,868

C. Marketable debt assets in other financial investments

Composition:

December 31 2009 2008 NIS millions

Government debentures or government guarantee 3,494 1,819

Other non-marketable debt assets 2,324 2,495

Other marketable debt assets 3 13

Total marketable debt assets 5,821 4,327

Impairment recognized in profit or loss (cumulative) 32 157

D. Non-marketable debt assets in other financial investments

Composition:

Carrying amount Fair value 2009 2008 2009 2008 NIS millions

Government debentures or government guarantee 4,888 4,675 5,482 4,942

Other non-marketable debt assets 2,874 3,053 3,156 2,821

Total marketable debt assets 7,762 7,728 8,638 7,763

C-61 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 11 – FINANCIAL INVESTMENTS IN INSURANCE COMPANIES (CONTD.)

E. Shares

December 31 2009 2008 NIS millions

Marketable shares 151 60

Non-marketable shares 42 45

Total shares 193 105

Impairment recognized in profit or loss (cumulative) 24 52

F. Other finance investments

December 31 2009 2008 NIS millions

Marketable financial investments 372 541

Non-marketable financial investments 111 107

Other financial investments include mainly investments in index certificates, mutual fund certificates, investment funds, financial derivatives, future contracts, options and structured products.

G. Disclosure of other financial investments measured at fair value

December 31, 2009 Level 1 Level 2 Level 3 Total NIS millions

Marketable debt assets 5,821 - - 5,821 Non-marketable debt assets 151 - 42 193 Shares 279 60 144 483 Other 6,251 60 186 6,497 Total 5,821 - - 5,821

C-62 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 11 – FINANCIAL INVESTMENTS IN INSURANCE COMPANIES (CONTD.)

Other finance Shares investments Total NIS millions

Balance at January 1, 2009 45 251 296

Total profits and losses:

In the statement of income (1 ) 8 7 In the statement of comprehensive income - - -

Changes: Purchases - 105 105 Sales (3) (217) (220) Transfer to level 3 1 - 1 Transfer from level 3 - (3 ) (3)

Balance at December 31, 2009 42 144 186

H. Interest rates used for determining fair value

In Israel

The fair value of non-convertible assets is measured at fair value through profit or loss. The fair value of non-convertible financial assets for which information on the fair value is given for information purposes only, is determined by discounting estimated cash flows. The discount rates are based on the yields of government debentures and margins of corporate debentures measured in the TASE plus a premium for non-marketability. The interest rates used for discounting are determined by the company providing interest quotes in relation to different risk ratings.

C-63 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 12 – LONG-TERM LOANS, DEPOSITS AND DEBTS

A. Composition:

Annual Weighted interest December 31 (1) 2009 2008 % NIS millions Loans

Linked to the CPI (2) 5.8 81 92 Linked to US dollar 2.2 4 17 Linked to other currency (mainly GBP) - 112 Euro-linked - 194 Unlinked (6) 4.7 128 51

213 466 Less - current maturities 30 14

183 452

Loan to the Fuel Administration (3) 3.4 249 169 Long-term trade receivables (4) 5.0 342 56 Debt balance for leases - 515 Limited deposits (5) 2.1 77 118 Others 121 72

972 1,382

1) At December 31, 2009 2) At December 31, 2009, includes NIS 24 million to interested parties (in 2008, NIS 22 million). See also Note 46. 3) The balance is in respect of fuel inventory purchased by Delek Israel for the Fuel Administration. Considering the characteristics and financial indicators of the agreement with the Fuel Administration regarding the inventory, the Fuel Administration' debt for this inventory is recognized as a debt and not in inventory. The debt is linked to the dollar exchange rate and bears interest at LIBOR + 0.75% up to December 31, 2007. As from January 1, 2008, as the result of an agreement with the Fuel Administration, the interest rate was adjusted to LIBOR + 1.5%-3.3%. A repayment date is yet to be set for this debt. At December 31, 2009, the interest rate is 3.4%. 4) At the beginning of 2009, the credit terms for some of Delek Automotive customers were changed such that the credit period for routine sales was extended significantly compared to the period up to that date (for periods of up to three months). Customer debts bear variable interest and the vehicles that were sold were pledged in favor of Delek Automotive. At December 31, 2009, the credit balance for the customers amounts to NIS 738 million and bears variable interest. The interest at December 31, 2009 is 5%. The customer balance that is due to be repaid beyond the coming year of NIS 342 million is included in this item. 5) The use of deposits was limited to securing repayments to credit providers. These deposits are linked to the US dollar.

6) Including a loan of NIS 34 million provided by Delek Motor Systems to an investee of Delek Real Estate (Vitania) for a joint venture to establish Mazda-Ford House. The loan bears interest of prime + 1% and is repayable in 2013.

C-64 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 12 – LONG-TERM LOANS, DEPOSITS AND DEBTS (CONTD.)

B. Repayment dates of loans

December 31, 2009 NIS millions

First year – current maturities 30 Second year 55 Third year 23 Fourth year 47 Fifth year 8 Six year and onwards 36 To be determined 14

213

C. See Note 34 for liens.

NOTE 13 – INVESTMENTS IN OTHER FINANCIAL ASSETS

December 31 2009 2008 NIS millions

Financial derivatives 4 30

Investment in available-for-sale financial assets (1)

Marketable shares 643 104 Non-marketable shares 629 882 Non-marketable participating units 1 126

1,273 1,112

Investments in financial assets recognized at fair value through profit or loss - marketable shares 141 45

1,418 1,187

C-65 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 13 – INVESTMENTS IN OTHER FINANCIAL ASSETS (CONTD.)

(1) Additional details in respect of the main investments in available-for-sale financial assets at December 31, 2009:

− Delek US holds 34.2% of the shares of Lion Oil (””Lion”). The remaining shares in Lion are held by a third party who is the controlling shareholder. From the date of acquisition (July 2007) through September 30, 2008, the investment in Lion was presented using the equity method. In the fourth quarter of 2008, Delek US assessed the accounting treatment and concluded that there is no material impact in Lion because, among other reasons, Delek US is unable to influence decisions made by the board of directors of Lion and because it does not have accessible financial information about Lion. Therefore, as from the second quarter of 2008, the investment in Lion is represented as an available-for-sale asset. The change in the accounting method is subsequent to the prior approval of the US Securities and Exchange Commission (SEC). At December 31, 2009, the balance of the investment in Lion amounts to NIS 498 million.

− The fair value was determined by the valuation of an external assessor and is mainly based on discounting the future cash flows expected to be received from it. To determine the recoverable amount, the pre-tax discount rate used was 11.9%.

− In August 2009, the board of directors of the Company resolved to approve the investment in an amount of $218 million to purchase shares in the American company, Noble Energy Inc. (“Noble”), which is traded on the NYSE. The investment in Noble shares is presented as a financial investment classified as an available-for-sale financial asset. In addition, the Group entered into an agreement with a foreign bank. Under the agreement, the bank provided the Company with a non-recourse loan of $120 million, repayable by May 31, 2012. The acquired Noble shares will be pledged to secure the loan.

During the five month period ended December 31, 2009, the Company acquired Noble shares and sold them at a total profit of NIS 46 million (before the impact of tax). At December 31, 2009, the balance of the investment in Noble shares amounts to NIS 440 million and the deferred income from this holding amounts to NIS 40 million, which is recognized in capital reserve under other comprehensive income.

− NIS 93 million represents an investment of 3.3% in the ownership in Mobileye BV, a company developing sensor technologies for the automotive industry. The investment is stated at fair value, based on the recent raising of capital in this company.

− NIS 120 million refers to the balance of the investment of Delek Investments in HOT. See Note 14(M)(1).

− Delek Investments holds 3.5% of the issued and paid up share capital of Oil Refineries Ltd. (“ORL”). In December 2009, Delek Investments sold all its holdings in ORL for NIS 129 million. The Company’s profit from the sale amounted to NIS 63 million (before the impact of tax), recognized in the statement of income in 2009 under finance revenue.

C-66 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 14 – INVESTMENTS IN INVESTEES AND PARTNERSHIPS

A. Composition:

Affiliates December 31 2009 2008 NIS millions

Shares 1,585 2,397 Capital bill loans (1) 640 570

2,225 2,967

Less - provision for impairment 19 19

2,206 2,948

The balance as at December 31, 2009 includes NIS 463 million for loans provided to Delek Real Estate. See section G below.

(1) See Note 29 for linkage conditions of loans to affiliates.

B. 1. Summary of the financial statements of affiliates

December 31 2009 2008 NIS millions Group share in net assets of affiliates according to the rate of holding as of the balance sheet date

Current assets 3,720 2,396 Non-current assets * 2,660 5,819 Assets in the insurance and financial sectors 2,536 7,264 Current liabilities (3,657) (2,617) Long term liabilities (1,578) (3,890) Liabilities in the insurance and financial sectors (2,096) (6,575)

Net assets 1,585 2,397

*) Including excess cost

Year ended December 31 2009 2008 2007 NIS millions

Group share in results of associates according to rate of holding as of the balance sheet date

Revenue 2,478 3,161 3,446

Net income (loss) 191 (12) 174

*) Including adjustment for excess cost

C-67 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 14 – INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.)

B. (contd.)

2. Condensed information of an affiliate

The Group holds 50% of IDE, which is stated according to the equity method. In 2009, the Group’s share in IDE amounted to NIS 140 million, representing 16% of the Group’s net profit attributable to the Group’s shareholders. Condensed information about IDE for each reporting period (in USD):

December 31 2009 2008 USD millions

Current assets 212 245 Non-current assets 346 252

Current liabilities 138 174 Non-current liabilities 270 250

Equity attributable to the Company’s shareholders 150 73

Year ended December 31 2009 2008 2007 USD millions

Revenue 377 270 116

Gross profit 96 55 37

Operating profit 68 36 26

Financing revenue (expenses) 12 (22) 3

Net profit 71 11 24

The exchange rate at December 31, 2009, used to translate the financial statements of the affiliate, is 3.775 (change in 2009 – a decrease of 0.7%).

C. Balance of the original difference yet to be derecognized:

At December 31, 2009, the balance of goodwill attributable to the investment in IDE is NIS 40 million.

C-68 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 14 – BUSINESS COMBINATIONS AND INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.)

D. Investments in shares listed for trading on the TASE:

December 31, 2009 December 31, 2008 Carrying Market Carrying Market amount value amount value NIS millions

Subsidiaries (1) 5,826 13,539 4,068 5,288 Partnerships and associates (2) 729 2,924 1,574 1,235

(1) Composition of the investment in shares of subsidiaries listed for trading on the TASE

December 31, 2009 December 31, 2008 Carrying Market Carrying Market amount value amount value NIS millions

Delek US Holdings Inc. 1,424 1,022 1,321 793 The Phoenix Holdings Ltd. *) 1,760 1,349 1,391 337 Delek Real Estate Ltd. - - 52 302 Delek - The Israel Fuel Corporation Ltd. 810 1,411 815 1,252 Delek Energy Systems Ltd. 22 3,871 (154) 969 Delek Automotive Systems Ltd. 367 2,113 247 1,005 Gadot Biochemical Industries Ltd. 149 106 133 28 Delek Drilling – Limited Partnership 323 2,805 263 602 Excellence Investments Ltd. 971 862 - -

5,826 13,539 4,068 5,288

*) Shortly before the approval date of the financial statements, the fair value of the investment amounted to NIS 1.705 billion.

(2) Composition of the investment in shares partnerships and affiliates listed for trading on the TASE

December 31, 2009 December 31, 2008 Carrying Market Carrying Market amount value amount value NIS millions

Avner Oil Exploration - Limited Partnership 605 2,739 280 536 Hot Cable Media Systems Ltd. - - 278 256 Industrial Buildings Ltd. - - 482 226 Mehadrin Ltd. 164 156 141 61 Delek Real Estate Ltd. (40) 29 - - Excellence Investments Ltd. - - 393 156

729 2,924 1,574 1,235

C-69 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 14 – BUSINESS COMBINATIONS AND INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.)

E. Additional information about an affiliate held indirectly by the Company

Company’s Provided by the interest in Company to an Investment capital and affiliate in an Guarante Country of voting rights Loans es affiliate incorporation % NIS millions 2009

Delek Real Estate *) Israel 4.98% 353 60 (40)

*) An affiliate as from 2009. See Note (G)(1) below.

F. Subsidiaries

1. Additional information about investees held indirectly by the Company

Company’s Investment interest in in an Country capital and Provided by the Company equity- of voting to a subsidiary accounted incorporat rights Loans Guarantees investee ion % NIS millions

2009

Delek Investments and Properties Ltd. Israel 100 3,053 750 1,697 Delek Petroleum Ltd. Israel 100 925 1,766

3,978 750 3,463

2008

Delek Investments and Properties Ltd. Israel 100 533 750 *) 2,632 Delek Petroleum Ltd. Israel 100 1,820 - 672 Delek Real Estate Ltd. Israel 80 42 69 331

2,395 819 3,635 *) A joint guarantee of Delek Investments and Properties was provided against this loan.

2. Dividend from subsidiaries

Year ended December 31 2009 2008 2007 NIS millions

Delek Investments and Properties Ltd. - - 137 Delek Petroleum Ltd. - - 47 Delek Real Estate Ltd. - - 122

- - 306

C-70 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 14 – BUSINESS COMBINATIONS AND INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.)

Principal changes in subsidiaries

G. Distribution of Delek Real Estate shares as a dividend in kind.

1. In October 2008, the board of directors of the Company resolved to distribute all or most of its shares in Delek Real Estate to the Company’s shareholders, subject to receiving the required approvals by virtue of the covenants of the Company and Delek Real Estate towards third parties.

On March 31, 2009, after receiving these approvals, the board of directors resolved to distribute the majority of Delek Real Estate shares held by the Company as a dividend to the shareholders of the Company. The record date was set for April 20, 2009 and the distribution date was May 3, 2009. Subsequent to the distribution, the Group holds 5% of Delek Real Estate’s issued and paid up share capital. The balance of the investment is accounted by the equity method.

Following the distribution, the equity of the Group was reduced by the amount of the distributed investment and the implications of the attributed tax (the total amount is NIS 171 million). It is noted that the Company and its subsidiaries extended loans and/or guarantees to Delek Real Estate amounting to NIS 550 million at December 31, 2009 (not including investments of profit- sharing policies and ETF in debt securities of Delek Real Estate).

In this context, it is noted that for loans that the Company provided to Delek Real Estate, which amount to NIS 368 million at December 31, 200 (including cumulative interest), and which are included in the aforementioned amount, on July 12, 2009, the general meeting of the Company’s shareholders approved the extension of the term of the loans until December 31, 2010 or until the date of the sale of rights in RoadChef, whichever earlier, under the same terms as the current terms, with the exception of interest on the loans, which was adjusted to 9.5% and will be paid semi-annually. In addition, to secure repayment of these loans, Delek Real Estate undertook to mortgage its rights in a real estate asset (Adar House) in favor of the Group, as a second lien, subject to approval of the bank which has a first lien on these rights. On December 31, 2010, Delek Real Estate will pay an additional 1.2% interest for the period prior to registration of the mortgage of Adar House. In view of the delay in the sales procedures of RoadChef, which is partially due to the economic slowdown in the UK and the impairment of RoadChef assets (see section 2(V) below), in March 2010, the Company notified Delek Real Estate that at the approval date of the financial statements, the management of the Company is willing, if a request is received from Delek Real Estate, to recommend to the certified organs of the Company, an extension of the repayment date of the loan provided by the Company to Delek Real Estate as set out above, subject to approvals as required by the law.

It is noted that to distribute the shares of Delek Real Estate as a dividend in kind, the Company entered into an agreement with a bank, according to which, inter alia, the bank lifted the lien on the shares of Delek Real Estate. In addition, the Company undertook that when Delek Real Estate repays any part of the loans provided by the Company to Delek Real Estate for RoadChef (principle of NIS 280 million), the Company will acquire from the bank, in the amount of the repaid loan, part of the rights in the debt of Delek Real estate towards the bank, up to a total of NIS 150 million. The bank will sell the debt to the Company without transferring any of the rights of the bank to the collateral that was or will be provided in its favor to secure the debt. The Company will be entitled to record a second lien for all the assets securing the debt, subject to a number of preconditions. To guarantee the liabilities of the Company towards the bank, the Company assigned, by way of a first lien in favor of the bank, all its rights in accordance with the loan agreements of Delek Real Estate for RoadChef.

For the loans provided by The Phoenix (nostro) to Delek Real Estate, the balance of which amounts to NIS 109 million at December 31, 2009, and which are included in the amount set out above, and for the loans provided to Delek Real Estate from the funds of profit-sharing policies, amounting to NIS 121 million, it is noted that in August 2009, Delek Real Estate did not pay the current maturities on time, and asked The Phoenix to waive its right to call for repayment of the loan, as a result of lower rating and/or failure to comply with the additional financial covenants.

C-71 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 14 – INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.)

Principal changes in subsidiaries (contd.)

G. Distribution of Delek Real Estate shares as a dividend in kind. (contd.)

1. (contd.) Delek Real Estate and The Phoenix agreed that in return for deferral of the payment of the current maturities and the aforesaid waivers, The Phoenix received additional collateral for the loans48% of the shares of Vitania Ltd. (“Vitania”) and the rights in accordance with the shareholders agreements of Vitania, increase in the amount of the pledged shareholders’ loans from NIS 180 million to NIS 280 million and the pledge of two other lots. In addition, the interest for each of the loans was raised by 2.5% until the last payment date of the loans. Payments of the loan were brought forward, according to the payment schedule, so that NIS 182 million of the loan will be paid by January 1, 2011 and the balance of the loan will be paid by August 2012. After Delek Real Estate pays NIS 182 million out of this debt, at the agreed dates, the pledge on Vitania’s shares will be removed. In November 2009, the general meeting of The Phoenix approved the change to these loan conditions.

As aforesaid, following distribution of the dividend in kind, the Company no longer consolidates the operations of Delek Real Estate in its financial statements. The balance of the investment in Delek Real Estates is stated in the financial statement according to the equity method and amounts to NIS 423 million at December 31, 2009 (not including the loads provided by the profit-sharing policies).

As a result of deconsolidation, total assets in the consolidated balance sheet decreased by NIS 23 billion (mainly due to investment property and available-for-sale assets) and total liabilities decreased by NIS 22 billion (mainly due to short- and long-term loans from banks and debentures issued by Delek Real Estate).

The results of Delek Real Estate operations were presented separately in the statement of income under profit (loss) from discontinued operations, with reclassification of comparative figures.

The table below presents information on the results of operations attributable to the discontinued operations.

Year ended December 31 2009 *) 2008 2007 NIS millions

Revenue 406 1,654 3,273 Cost of revenue 118 389 2,284

Gross profit 288 1,265 989

Appreciation (depreciation) of investment property, net 3 (746) 759 Selling and marketing expenses 2 16 13 General and administrative expenses 45 302 231 Other revenue (expenses), net 2 (30) (14)

Profit from ordinary operations 246 171 1,490

Finance revenue 54 155 186 Finance expenses 251 2,244 1,161

49 (1,918) 515

Loss from disposal of investments in investees, net - - 81 Group’s share in profits (losses) of affiliate partnerships, net 3 (363) 136

Profit (loss) before income tax 52 (2,281) 570 Income tax (tax benefit) 35 (336) 34

Net profit (loss) 17 (1,945) 536

*) The information for 2009 refers to the operating results of Delek Real Estate up to the date of deconsolidation.

C-72 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 14 – INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.)

Principal changes in subsidiaries (contd.)

G. Distribution of Delek Real Estate shares as a dividend in kind. (contd.)

1. (contd.) The table below presents information on the comprehensive income attributable to discontinued operations.

Year ended December 31 2009 *) 2008 2007 NIS millions

Profit (loss) for available-for-sale assets, net 1 (50) 81

Profit (loss) for cash flow hedges, net (63) (136) 13

Adjustments for translation of financial statements of foreign operations 268 (1,009) (119)

Company’s share in other comprehensive loss of affiliates (8) (87) -

Revaluation of existing investment upon increase in control - 20 -

Other comprehensive profit (loss) from discontinued operations, net 198 (1,262) (25)

*) The information for 2009 refers to the operating results of Delek Real Estate up to the date of deconsolidation.

2. On December 3, 2009, the Securities Authority conducted a search in the offices of Delek Real Estate, in respect of the assets belonging to subsidiaries of Delek Real Estate abroad.

On January 2, 2010, Delek Real Estate reported that, to the best of its knowledge, the issues under investigation by the Securities Authority are in respect of the following issues:

− Investigation of the accounting presentation of Delek Real Estate’s investments in Hilton and Marriot hotels − Valuation of a foreign company holding parking lots in the UK, leased to NCP Ltd., as stated in the financial statements of Delek Real Estate in 2007-2009. − Investigation of the agreement of Delek Real Estate’s foreign subsidiary with a third party in respect of operating RoadChef properties

At the approval date of the financial statements, there is uncertainty regarding the results of this investigation and the results of the investigation carried out by the Securities Authority regarding the accounting treatment in these issues.

The management of Delek Real Estate believes that, based on the information available at this stage, the aforesaid does not affect the financial statements. However, Delek Real Estate is unable to assess the final results of the investigation, and any implications they may have on the financial statements of Delek Real Estate in these matters.

It is noted that as Delek Real Estate is a subsidiary of the Group up to the distribution date of its shares as a dividend in kind (as set out above), any effect of the investigation on the financial statements of Delek Real Estate could affect the Group’s financial statements for the reporting period.

C-73 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 14 – INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.)

H. Insurance and finance operations

1. Acquisition of Excellence shares

A. On April 9, 2006, The Phoenix Investments completed the acquisition of 40% of the shares of Excellence Investments Ltd. (“Excellence”) for a consideration of NIS 323 million.

Under the agreement, as from January 1, 2009, The Phoenix Investments has a call option and from February 1, 2009, the sellers have a put option for the acquisition or sale of an additional 40.88% of Excellence shares to The Phoenix Investments, respectively. In addition, the agreement set forth adjustments to profit and equity to be included in calculation of the consideration.

To determine the fair value of Excellence shares at December 31, 2008, independent external assessors carried out a valuation.

According to the valuation, the value of Excellence shares (100%) at December 31, 2008, is NIS 988 million.

Based on this valuation, the value of Excellence shares the underlying exercise of the put option is NIS 403 million. The difference between this amount and the current value of the estimated consideration according to the put option of NIS 570 million is NIS 167 million. This amount was recorded under other payables (provision for an onerous contract) in the financial statements as at December 31, 2008.

As from January 1, 2009, the date on which the call options were exercisable, The Phoenix Investments consolidates Excellence in its financial statements.

The transaction was accounted for with the acquisition method in accordance with IFRS 3. The consolidated financial statements include the financial statements of Excellence as from January 1, 2009. Following consolidation of the financial statements of Excellence, The Phoenix Investments recorded a liability for payment for the option to purchase the shares in an investee, the balance of which is NIS 570 million at January 1, 2009.

The total cost of the investment in Excellence at January 31, 2009 amounted to NIS 799 million, after deducting provisions of NIS 167 million for a loss in respect of the acquisition and NIS 11 million for impairment, reflecting the share of The Phoenix Investments in the fair value of Excellence shares at January 1, 2009.

C-74 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 14 – INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.)

H. Insurance and finance operations (contd.)

1. Acquisition of Excellence shares (contd.)

The fair value of the identifiable assets and liabilities of Excellence, based on the valuation of the external independent assessors, is as follows:

Carrying Fair value amount NIS millions

Cash and cash equivalents 164 164 Financial investments for holders of exchange traded funds 8,738 8,738 Other finance investments 111 111 Credit for acquisition of securities 195 195 Cash and cash equivalents pledged for holders of Debentures, exchange traded funds, reverse certificates, complex certificates and deposit certificates 2,473 2,473 Other receivables 168 168 Deferred tax 8 8 Investments in affiliates 69 69 Property, plant and equipment, net 18 18 Excellence goodwill - 276 Existing portfolio fair value 161 102 Brand fair value 27 1 Non-competition agreement 10 -

Total assets 12,142 12,323

Contingent liabilities identified on acquisition 1 - Borrowings from banks 200 200 Exchange traded funds and deposit 10,768 10,768 Liability for short sale of securities 122 122 Other payables 214 214 Deferred taxes 60 25 Income tax 71 71 Other debentures 445 445 Non-controlling interest 7 7

Total liabilities 11,888 11,852

Net identifiable assets 254 471 Less the minority share in identifiable assets (49)

Share of The Phoenix Investments in identifiable assets 205 Goodwill arising upon acquisition 594

Total cost of acquisition 799

Cash used for acquisition

Cash and cash equivalents in the acquired company at the acquisition date 164 Cash paid (799)

Cash, net (635)

C-75 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 14 – INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.)

H. Insurance and finance operations (contd.)

1. Acquisition of Excellence shares (contd.)

B. The new agreement

At the beginning of 2009, a disagreement arose between The Phoenix Investments and Aharon Biram, Gil Deutsch and Esther Deutsch, the controlling shareholders in Excellence Investments (“the sellers”) regarding exercise of the put option and the existence of the agreement. On June 14, 2009, after lengthy negotiations, the sellers and The Phoenix Investments signed an agreement (“the new agreement”). The main points of the agreement are as follows:

The transaction

The Phoenix Investments will acquire from the sellers 6,958,842 shares of Excellence representing 40.88% of the share capital of Excellence, in five unequal lots (“Excellence shares” or “the shares”). First lot: 20.44% of the issued capital of Excellence; second to fifth lot: 5.11% of the issued capital of Excellence (the sellers may increase the third lot to 5.35% of the issued capital of Excellence, such that the fourth and fifth lots will be each be equivalent to 4.99% of the issued capital of Excellence). The acquisition date of the shares in the first lot will be on the third business day after the day on which all the preconditions are fulfilled, as described below. The acquisition date of the shares in each of the second to fifth lots will be up to 35 days after approval of the financial statements by Excellence in each of the years 2009 to 2012.

The consideration

The total consideration for the shares will be between NIS 620 million and a maximum of NIS 730 million, linked to the CPI published on April 15, 2009, as follows: first payment – NIS 340 million plus annual interest at prime + 0.5%, starting on May 3, 2009. Second to fifth payments – based on the formula in the original agreement, subject to certain adjustments to the definition of the profit.

The minimum payment for the second lot is NIS 70 million linked to the known CPI on May 3, 2009 (“the CPI”). The maximum payment is NIS 120 million linked to the CPI, and NIS 90 million linked to the CPI for each of the third to fifth lots. The consideration will be adjusted for any dividend actually distributed to the sellers, within certain limitations set out in the agreement. Amounts paid as a dividend to the sellers will not be deducted from the amount obtained from the formula.

The liability for payment is capitalized to the end of the reporting period. The difference of NIS 94 million between the liability as calculated on the basis of the new agreement and the liability in the books as calculated on the basis of the original agreement is recognized in goodwill and NIS 36 million is recognized in finance expenses. At December 31, 2009, the liability amounts to NIS 347 million (less the payment for the first lot). Changes in the amount of the liability in subsequent periods, caused by a change in the estimated expected payment, are recognized in goodwill, subject to a valuation that supports the fair value of the cash-generating units. Independent assessors assessed the goodwill of The Phoenix Investments at June 30, 2009.

C-76 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 14 – INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.)

H. Insurance and finance operations (contd.)

1. Acquisition of Excellence shares (contd.)

Additional conditions

The Phoenix Investments may accelerate the purchase of Excellence shares at any time and the sellers may accelerate the purchase of the shares that have not been purchased on the acceleration date, in the circumstances set out in the agreement. Up to payment date of the consideration for the second lot, which is expected to be in April 2010, the current controlling shareholders will continue to serve as directors in Excellence and there will continue to be equality in the appointment of directors to the board of directors of Excellence, between The Phoenix Investments and the former controlling shareholders. From the second lot onwards, The Phoenix Investments will be entitled to increase the number of its directors in Excellence and its subsidiaries, and in any event the number of directors in Excellence on The Phoenix Investment’s behalf will be greater than the number of all the other directors, including outside directors. The Company guaranteed all the undertakings of The Phoenix Investments for an unlimited amount, in accordance with the terms of the new agreement.

On August 25, 2009, all the required regulatory approvals were received and the transaction set out in the new agreement was completed. On the closing date, The Phoenix Investments acquired the first lot of 3,479,421 Excellence shares from the sellers, as stipulated in the new agreement, representing 20.44% of the issued and paid up share capital of Excellence, for NIS 342.7 million. The acceleration right for acquisition of the shares for The Phoenix Investments and for the sellers is the same, from an accounting aspect, as the call and put options in the original agreement, therefore the new agreement did not require a change in the accounting treatment.

C. Additional acquisition of Excellence shares

On November 24, 2009, The Phoenix Investments acquired 4.48% of the share capital of Excellence for NIS 43 million in a off-floor transaction and on December 22, 2009, The Phoenix Investments acquired 0.39% of the share capital of Excellence for NIS 4 million in an off-floor transaction. Additional goodwill of NIS 20 million was recognized for these acquisitions.

At December 31, 2009, and subsequent to these acquisitions, The Phoenix Investments holds 65.41% of the issued and paid up share capital of Excellence. The share of The Phoenix in the equity and profit of Excellence includes shares that have not been purchased however they may be accelerated and represent 85.85% at the reporting date. Subsequent to the reporting date, on January 5, 2010, The Phoenix Investments acquired an additional 82,059 shares representing 0.48% of the share capital of Excellence for NIS 5 million in an off-floor transaction. Shortly before the approval date of the financial statements, The Phoenix holds 65.89% of the issued and paid up share capital of Excellence.

2. Prisma transaction

On February 25, 2009 Excellence and companies under its control signed an agreement with Prisma Investment House Ltd. ("Prisma") to acquire Prisma’s trust funds, ETF and portfolio management operations (“the agreement”).

Under the agreement, Excellence Nessuah Trust Fund Management (a subsidiary, “Excellence Funds”), which holds the trust fund operations of the Group, will acquire all the shares of Prisma Trust Funds Ltd (a wholly owned company of Prisma, "Prisma Funds") which holds Prisma Group's trust fund management operations. Prisma Funds will be transferred to Excellence Funds, as described above, when the balance of the bank loan amounts to NIS 130 million, as set out below. The agreement also includes acquisition of Prisma’s portfolio management operations.

C-77 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 14 – INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.)

H. Insurance and finance operations (contd.)

2. (contd.) The consideration for acquisition of Prisma shares and portfolio management operations, as describe above, will include the following components:

a. Once Prisma Funds shares are transferred to Excellence Funds, the latter will allocate shares to Prisma representing 45% of the issued and paid-up shares in Excellence Funds ("the allocated shares"). b. During 2014-2017, Prisma will be required to sell to Excellence, and Excellence will be required to acquire from Prisma, all of the allocated shares, at the rates stipulated in the agreement and for a consideration that will be based on the formula in the agreement, which is based, inter alia, on the future profits of Excellence Funds (“the consideration for the shares”). c. During the period that Prisma holds the allocated shares, Prisma Funds will distribute quarterly dividends at the maximum amount permitted by law and Excellence Funds will distribute all these dividends to its shareholders, with the exception of minimum amounts required to comply with the various legal requirements (“the quarterly dividends”). d. During the period that Prisma holds the allocated shares, Prisma Funds will pay amounts for the capital note that it had issued to Prisma (and for which payment dates had not been set). The payment amounts are according to the formula in the agreement, based, inter alia, on the future profits of Prisma Funds and the number of allocated shares held by Prisma (“payment of the capital note”). On termination of Prisma’s holding of the allocated shares, Prisma will transfer all its rights in the capital note to Excellence Funds. e. In addition, during the period that Prisma holds the allocated shares, there will be various financial and decision-making arrangements between the parties, as set forth in the agreement.

On June 9, 2009, the parties completed the transactions, under the terms described above, after fulfillment of all the preconditions that were set. The consideration for the transaction was estimated at NIS 185 million at the completion date of the transaction, which is the estimated acquisition cost and includes the three abovementioned components (consideration for the shares, quarterly dividends and payment of the capital note), at their present value, was recognized as a liability for a contingent consideration. The excess acquisition cost of NIS 306 million for the Company’s share in the fair value of the identifiable assets was recognized in goodwill.

Based on the opinion of an independent assessor, the management of the Company allocated the acquisition cost, inter alia, as follows: NIS 7.7 million is attributable to the current portfolio and amortized over one year and NIS 1 million is attributable to the brand and amortized over five years.

Based on the opinion of an independent assessor, the management of the Company allocated the acquisition cost, inter alia, as follows: NIS 7.7 million will be attributed to an existing portfolio for the right to receive income from management fees for the mutual fund assets at the acquisition date, and this will be amortized over one year. NIS 1 million will be attributed to the brand and will be amortized over five years. Excellence periodically reassesses the contingent consideration and goodwill is adjusted accordingly. The liability for the contingent consideration on December 31, 2009, is NIS 215 million.

In addition, at the completion date of the transaction, Prisma Funds and the banks signed a new financing agreement for extension of a loan of NIS 130 million to Prisma Funds. The loan is payable in four quarterly payments. Under the agreement, Prisma Funds undertook to fulfill the financial covenants relating to EBITDA, turnover and net profit, as well as the pledges on its assets and interests. As at December 31, 2009, Prisma Funds is in compliance with the financial covenants. In addition, Excellence acquired Prisma's ETF companies and financial instruments for a consideration equivalent to the equity, after adjustments of the acquired companies (NIS 27 million), with the addition of NIS 7 million. The portfolio management operations acquired as aforesaid were sold for NIS 7 million shortly after completion of the transaction.

C-78 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 14 – INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.)

H. Insurance and finance operations (contd.)

3. In August 2009, The Phoenix issued 27,879,131 ordinary shares of NIS 1 par value to its shareholders by way of rights in consideration of NIS 126 million. The Group exercised the entire quantity of rights that it was offered in consideration of NIS 68 million.

4. In September 2009 there was a heavy hail storm in Texas, USA (in the area of Republic’s operations). Republic recorded a loss of $20 million (before the impact of tax) as a result of this storm.

5. As set out in Note 2(G), the Group eliminates the revaluation to market value of securities of Group companies (shares and debentures), which was carried out by SPCs that issue and manage ETFs and by profit-sharing policies of insurance companies. These holdings are accounted for in accordance with generally accepted accounting principles for the acquisition (sale) of treasury shares, acquisition (sale) of other shares of subsidiaries and joint holding of debentures. The effect of the accounting treatment on the net profit for 2009 attributable to the Company’s shareholders (taking into account the tax effect and the non-controlling interest) amounted to a loss of NIS 25 million.

I. Fuel operations in the US

On November 20, 2008, a fire broke out at Delek US refinery in Tyler, Texas. Two employees died of their injuries sustained in the fire. The refinery was shut down to enable a thorough investigation of the circumstances of the event and the extent of the loss. The fire caused damage in two of the refinery’s operating units. As well as repairing the damage, it was decided to carry out periodic renovation and works to improve facilities. In May 2009, the refinery continued operations.

In 2009, Delek US received $116 million (NIS 465 million) from the insurance company, including $64.1 million (NIS 257 million) for loss of profits and $51.9 million (NIS 208 million) for damage to property, which was recorded in the financial statements less costs in the amount of $11.6 million (NIS 46 million). Net income of NIS 419 million was recorded in the statement of income for 2009 under other income (expenses).

J. Fuel operations in Europe

1. As part of the reorganization process, Delek Benelux decided to move its offices to Breda in Holland. Following this decision, and under the agreement signed between the management and the employees, in 2008 and 2009, Delek Benelux recorded provisions of €16 million (NIS 85 million) and €3 million (NIS 15 million), respectively, in other income, net, for these years.

2. Subsequent to the balance sheet date, in February 2010, Delek Europe BV submitted a binding proposal to acquire the fuel marketing operations of BP France SA (“BP”) in France, which includes 416 BP gas stations, convenience stores in France and the holdings in three terminals the marketing operations). The transaction includes a license for exclusive use of the BP brand in France in the gas stations.

In consideration for the acquisition of the marketing operations, Delek Europe offered to pay €180 million before working capital adjustments and other adjustments, as they will be on the completion date of the transaction. At the submission date of the offer, Delek Europe paid an advance of €10 million for exclusivity from BP to negotiate for completion of the transaction to acquire the marketing operations. The offer is valid up to October 15, 2010.

C-79 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 14 – INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.)

K. Fuel operations in Israel

1. In June 2009, Delek Petroleum sold 6.51% of Delek Israel shares for NIS 95 million. As a result of the sale, the Group’s holding in Delek Israel fell to 79.17%. The profit arising from this sale amounted to NIS 31 million (before the effect of tax).

2. On August 27, 2009, the board of directors of Delek Israel approved a system whereby the former CEO of the Company may exercise options based on the benefit component under the 2007 plan for the allotment of options, approved by the board of directors of Delek Israel on November 5, 2007. On September 22, 2009, the former CEO of Delek Israel exercised 437,930 options into 253,782 shares of Delek Israel. As a result, the Group’s holdings in Delek Israel dropped to 77.4%. Exercise of the options resulted in a profit of NIS 8 million for the Group. L. Oil and gas exploration and production

1. In November 2009, a subsidiary, Delek Energy Systems Ltd. (“DES”) issued a shelf offering for holders of participating units of Avner Oil Exploration Limited Partnership (an affiliate partnership, “Avner”) for the acquisition of up to 325,899,000 participating units of NIS 0.01 par value in consideration of up to 517,300 ordinary shares of DES of NIS 1 par value (in other words, one ordinary share for each 630 participating units). Following the tender offer, notices of allowance were received from the holders of 247,926,781 participating units in Avner (representing 7.43% of Avner’s total participating units). In return, DES issued 393,535 ordinary shares. As a result, DES’s holding in Avner was increased to 45.55% and the Group’s holding in DES was reduced to 81.9%. Following the share issue and acquisition of the participating units in Avner, the equity of DES increased by NIS 350 million, according to the fair value of DES shares that were issued (less issuance expenses). Following the decrease in the Group's holding in DES, the Group recorded a profit of NIS 200 million (after deducting a profit of NIS 150 million for the effective rate of the participating units in Avner, which were acquired under this transaction). This profit was included under profit from the disposal of investments in investees.

2. In November 2009, Delek Investments sold 107,750 shares of DES representing 2.15% of the share capital DES (after completion of the exchange tender offer, as described above), to third parties, in consideration of NIS 94 million. The Group recorded a profit of NIS 90 million for the sale (before the impact of tax), which was recognized under profit from the sale of investments in investees. Subsequent to this sale, the Company holds 79.7% of the share capital in DES.

M. Other operations

1. In November 2009, the Group signed an agreement with Cool Holdings Ltd, for the sale of 9,127,271 shares of HOT Communications Systems Ltd. (“HOT”), representing 12% of the share capital of HOT, at a price of NIS 44 per share. The consideration for the sale amounted to NIS 402 million. In December 2009, all the preconditions were fulfilled and the transaction was completed. After completion of the transaction, the Group‘s holding in HOT fell to 4.9%. The Group recorded a profit of NIS 195 million for the sale (before the impact of tax), which was recognized under profit from the sale of investments in investees. In view of the sale, the balance of the investment in HOT is presented under investments in other financial assets as an available-for-sale financial asset (see also Note 13).

2. The Group holds 25% of the share capital of Delek Motorway Services UK (DMS) through Delek Petroleum. The balance of the shares are held by Delek Real Estate (a related party). DMS holds the full share capital of a UK company (MSA), which owns RoadChef Ltd. RoadChef owns 29 roadside service stations in the UK, operating under the RoadChef brand. The group of companies is referred to hereunder as RoadChef.

In November 2008, Delek Petroleum and Delek Real Estate decided to dispose of their investment in RoadChef. Therefore, as from that date, the investment is presented under available-for-sale assets.

C-80 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 14 – INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.)

M. Other operations

2. (contd.) In 2009, and up to February 2010, potential buyers made assessments and made offers to purchase the investment. In 2009, based, inter alia, on the offers received in the framework of the process for the sale of the investment and for impairment of assets included in the statements of RoadChef, the Group reduced its investment in RoadChef by NIS 38 million, which was included in other income (expenses), net. The balance of the investment at December 31, 2009, stated under available-for-sale assets, amounts to NIS 177 million (adjustment of the Group's share in the equity of RoadChef after impairment and with the addition of the outstanding loan by Delek Petroleum to RoadChef).

Further to the aforesaid, in February 2010, due to the stagnation in negotiations with a potential buyer, the managements of Delek Real Estate and Delek Petroleum concluded that there is a significantly lower likelihood of selling the asset at the required price and it is highly unlikely that the sale will be made in the required conditions (at the same time, Delek Real Estate and Delek Petroleum will continue to explore opportunities for disposing of the investment, either by selling the shares or by another transaction) Therefore, and in accordance with IAS 28, as from the first quarter of 2010, the investment in RoadChef will be accounted for retrospectively according to the equity method.

The effect on the financial statements of the Group in 2009 and in prior periods as a result of the expected change in the accounting treatment of the investment in RoadChef is not expected to be material.

N. Share-based payment in Group companies

1. Expense recognized in the financial statements

The expense recognized in the financial statements for services received from employees is presented in the table below:

Year ended December 31 2009 2008 2007 NIS millions Equity-settled share-based payment plans 31 52 85 Cash-settled share-based payment transactions 23 8 5

Total recognized expense from share-based payment transactions 54 60 87

2. Additional information:

No. of options Average no. in Vested Exercise price Exercise of of years for Company circulation options per share plan exercise 31 December 2009

Delek USA 3,106,125 1,456,118 USD 6.7 Shares 4.3 Delek USA 1,850,040 - USD 12.1 Shares/cash 4.8 Delek Israel 493,183 193,219 NIS 70-198 Shares 3.5 Delek Israel 300,000 - NIS 134-155 Cash 4.2 Delek Europe 750 390 EUR 860-1,045 Shares/cash 2.4 Delek Benelux 45,000 28,125 EUR 72-83 Shares/cash 1.8 NIS 387.7- Delek Energy 313,610 143,891 409.5 Shares 4.6 Delek Automotive 2,336,501 976,501 NIS 16.16 Shares 1.4 Phoenix 10,898,279 1,573,467 NIS 8.44-20.8 Shares 4.1

C-81 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 14 – INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.)

N. Share-based payment in Group companies (c0ntd.)

3. Main share-based payments plans in the Group companies during the reporting period

a) In September 2009, Delek US signed a new employment agreement with the CEO of Delek US. Under the agreement, the CEO was allotted, inter alia, 1,850,040 share appreciation rights (SARs) according to the 2006 compensation plan of Delek US. The options will vest from March 31, 2010 until October 31, 2013 at different exercise prices. The options will expire one year after termination of the CEO’s employment or on October 31, 2014, whichever is earlier. The financial value of the options amounts to $4.6 million. The options are exercisable into ordinary shares or cash at the sole discretion of Delek US. In September 2009, the board of directors of Delek US approved an agreement for 1,319,493 options that were granted to the CEO of Delek US under the previous employment agreement, which were not exercised, according to which the CEO of Delek US is entitled to receive the difference between the listed share price and the theoretic exercise price in shares, as defined in the agreement. Subsequent to the reporting date, in February 2010, the CEO of Delek US exercised the options into shares under the agreement, and he received 638,909 shares.

b) On March 19, 2009, the audit committee and board of directors of Delek Israel approved the appointment of David Kaminitz as CEO of Delek Israel and an agreement for supply of services between Delek Israel and a company wholly owned by David Kaminitz (the management company)

Delek Israel also signed an agreement with the management company for allocation of options. Under the agreement, Delek Israel will grant the management company 300,000 options for Delek Israel shares representing 2.7% of the issued and paid up capital of Delek Israel (2.38% fully diluted) exercisable into Delek Israel shares in equal portions of 75,000 options each, commencing from March 1, 2010 until March 1, 2013. The options will expire on March 2, 2014 or on other dates as stipulated in the agreement. The nominal exercise increment is between NIS 134.24 and NIS 155.4 for each option warrant, subject to adjustments for a dividend. The management company may choose to exercise the option either through a cash payment of the exercise increment (in this case, the management company may receive a non-recourse loan from Delek Israel, linked to the CPI, bearing 4% interest), or by exercising the options into shares based on the value of the benefit. In this case, the nominal value of the shares underlying the exercise will be paid.

It was further agreed that Delek Israel will apply to the income tax authorities for confirmation that the benefit for which the management company will be charged at the exercise date will be approved as an expense. If this approval is not received by February 1, 2010, Delek Israel may announce that the options will be replaced by payment of a phantom grant, which will be calculated at any date, after the management company submits a letter of demand, according to the difference between the share price and the exercise price. At the preparation date of the financial statements, Delek Israel has not yet received confirmation from the income tax authorities, therefore the allotment of the options was replaced by payment of a phantom bonus and accounted for as a share-based payment settled in cash. At December 31, 2009, the financial value of the options, which were calculated on the basis of the binomial model, amounts to NIS 18.7 million.

At December 31, 2009, Delek Israel included a provision of NIS 8.1 million for this plan in its financial statements, under provisions and other long-term liabilities.

The main assumptions and parameters used to calculate the economic value are as follows:

The price of an ordinary share at December 31, 2009 is NIS 161. The discount rate is based on the risk-free nominal yield curve in Israel for the life of the option (2.4%-4.6%). The standard deviation in options warrants (Series 1) which are traded on the TASE is 37.78%.

C-82 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 14 – INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.)

N. Share-based payment in Group companies (c0ntd.)

3. Share-based payments plans in the Group companies during the reporting period (contd.)

c) In August 2009, the board of directors of The Phoenix approved an allotment of 6,177,879 options, at no cost, to the new CEO of The Phoenix. Each option is exercisable into one ordinary share of The Phoenix.

The options will vest in four equal lots commencing from June 1, 2010 and up to July 1, 2013 and will be exercisable up to July 1, 2014. The exercise price of each option is NIS 7.976 plus an annual addition of 3.75% interest, which will be calculated for each lot of options, with the exception of the first lot. If the options are exercised, the CEO may receive a loan from The Phoenix for the payment of the exercise price. The loan will be secured solely by a first degree pledge on the exercise shares. The value of the options was calculated by an independent assessor using the binomial model as NIS 30 million at the grant date.

The following parameters were used to calculate the value:

Share price NIS 10.07 Exercise price NIS 7.976 – NIS 8.908 Standard deviation 79.96% - 46.57% Risk-free interest rate 4.27% - 1.37%

The options were allotted to the CEO of The Phoenix in return for the undertaking of The Phoenix to provide the CEO with a non-recourse loan to acquire The Phoenix shares.

d) On August 31, 2009, the board of directors of Delek resolved to adopt a plan for allotment of options to employees, officers, consultants and service providers of Delek Israel and affiliates. The options are exercisable into 72,000 ordinary shares of Delek Israel, par value NIS 1 each, subject to payment of the exercise price of between NIS 165.11 and NIS 197.64 per share.

The options are exercisable into shares in five equal lots from April 1, 2010 until April 1, 2014, and will expire on March 31, 2015. Of the allotted options, holders of 40,000 options are eligible for a non-recourse loan. The loan is linked to the CPI and bears annual interest of 4%. The loan is payable up to two months from the expiry date of the option warrants.

The financial value of the options at the approval date of the plan is NIS 3 million.

The financial value is based on the following information:

Share price: NIS 168.5 Annual standard deviation: 32% Nominal annual discount rate: 1.87%-4.65%

e) In 2009 and following termination of the term of employment of office holders at The Phoenix prior to completion of the vesting period, 2,659,550 options that were issued in the past by The Phoenix were foreclosed for employees. As a result of the aforesaid, in the reporting period, The Phoenix recorded income of NIS 7 million.

C-83 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 14 – INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.)

N. Share-based payment in Group companies (c0ntd.)

3. Share-based payments plans in the Group companies during the reporting period (contd.)

f) Subsequent to the reporting date, on January 17, 2010, a new chairman of the board of directors of DES was appointed, to replace the outgoing chairman of the board. At that date, the audit committee of the board of directors approved a package of phantom units for the new chairman of the board of directors, for no consideration, in a scope of 2% of the issued and paid up share capital of DES, in other words, 100,108 phantom units, in four equal lots. The exercise price is NIS 1,007 for each phantom unit of the first lot, which is the share price of DES on the trading day on which the agreement was approved by the board of directors, plus 5% for each lot as from the second lot. The exercise price is subject to adjustments following the distribution of a cash dividend during the year of the lot. he exercise price is subject to adjustments following the distribution of a cash dividend during the year of the lot.

The financial value of the options is NIS 40 million. The fair value of the option was estimated using the Merton method, based on the Black and Scholes calculation formula.

On March 3, 2010, the general meeting of DES approved the options plan.

NOTE 15 – INVESTMENT PROPERTY

A. Composition and change

2009 2008 NIS millions

Balance at January 1 13,354 18,451

Purchases 28 445 Direct capitalized acquisition costs - 3 Adjustments for translation of financial statements of foreign operations 1,169 (3,973) Transfer from property, plant and equipment (see Note 13(E)(1)(H) - 3,638 Classification of assets held for sale - (3,879) Sales (345) (411) Deconsolidation (13,752) - Adjustment to fair value (3) (920)

Balance at December 31 451 13,354

B. Investment property is presented according to fair value on the basis of valuations of external, independent assessors having the requisite qualifications and experience in the location and type of property being assessed. The fair value is based on recent market transactions in properties similar, and in similar locations to those of the properties owned by the Group companies, and on projected future cash flow from the property. In estimating cash flow, current leases are taken into consideration and discount rates are used which reflect market estimates of uncertainties with regard to future amount and timing of the cash flow. In calculating the fair value, assessors have used discount rates between 7%-9% in Israel and 6.75%-8.75% in Canada. In calculating the fair value of investment property, assessors take into account similar transactions for similar assets in similar places. At December 31, 2009, the balance of NIS 182 million is for performance-based assets.

C-84 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 16 – INVESTMENTS IN OIL AND GAS EXPLORATION AND PRODUCTION

A. Composition and change

Exploration and assessment Oil and gas assets assets Total NIS millions Cost

Balance at January 1, 2008 9 1,081 1,090

Additions during the year Investments 118 307 425 Company consolidated for the first time 18 341 359 Disposals (74) - (74) Adjustments for translation of financial statements of foreign operations - 17 17

Balance at December 31, 2008 71 1,746 1,817

Additions during the year Investments 128 195 323 Carry forwards (168) 168 - Disposals (primarily for deconsolidation of a company) - (332) (332) Adjustments for translation of financial statements of foreign operations 1 (18) (17)

Balance at December 31, 2009 32 1,759 1,791

Cumulative depreciation, depletion and amortization

Balance at January 1, 2008 - 203 203 Additions in 2009 - 130 130 Adjustments for translation of financial statements of foreign operations - 6 6

Balance at December 31, 2008 - 339 339 Additions in 2009 - 128 128 Adjustments for translation of financial statements of foreign operations - (7) (7)

Balance at December 31, 2009 - 460 460

Reduced balance for 31 December 2009 32 1,299 1,331

Reduced balance for 31 December 2008 71 1,407 1,478

C-85 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 16 – INVESTMENTS IN OIL AND GAS EXPLORATION AND PRODUCTION (CONTD.)

B. Marine drilling in the Yam Tethys joint venture

Delek Investments and DES hold the Yam Tethys joint venture through Delek Drilling Limited Partnership (“Delek Drilling”) and Avner (an affiliate). Investments also holds the Yam Tethys joint venture directly. The investments in Avner are stated in the financial statements by the equity method. The financial information in the financial statements of the Yam Tethys joint venture, used by Delek Investments and DES in the preparation of their financial statements, are based on documents and accounting information provided for the joint venture by its US operator (Noble Energy), which holds -47% of the concession.

In 1999-2001, the joint venture carried out offshore drillings at the Noa lease (Noa and Noa South I) and at the Ashkelon lease (Mari 1, Mari 2 and Mari 3), where gas was discovered in commercial quantities. In 2003, the establishment of production facility over the Mari gas field and the underwater pipeline to Ashdod were completed. In February 2004, natural gas started to flow from the Mari gas reserve to the Eshkol power station in Ashdod. In July 2006, gas started to flow to the Reading power station in Tel Aviv, pursuant to the agreement with the Israel Electric Corp. Ltd. (see section G(1) below), and in July 2008, to the Gezer power station and in the second quarter of 2009, to the Hagit power station. For additional details of the gas supply agreements, see section D(2) below. For details of the letters of intent, see section G(3) below.

In 2008, installation of compression facilities on the production platform commenced, following the decrease in pressure in the Mari field. The budget for the facilities is estimated at $80 million. Up to December 31, 2009, the investment amounted to $51.6 million. Based on the information that the operator submitted to the partners, the installation and/or its operation is expected to be completed in 2010, after the Mari B-8 and Mari B-9 drillings (see below). In November 2009, another two production drillings were approved in the Mari gas field (Mari B-8 and Mari B-9), at a total estimated cost of $85 million for all the Yam Tethys project partners. The drillings are expected to be performed in 2010 and aim to improve gas production capacity from the Mari field. Up to December 31, 2009, the investment amounted to $1.1 million.

Based on estimate by an independent foreign company (NSAI), the proved gas reserves in the Mari and Noa fields at March 2001 were 32.7 BCM (of which 26.5 BCM in the Mari field and the remainder in the Noa field). The gas reserves in the Mari field are tested and updated by NSAI once a year. An updated assessment for 2004-2009 of the size of the reserves indicates 1.3 BCM more than the initial estimate. Following gas sales in 2004-2009 amounting to 14.4 BCM (of which 2.9 BCM in the 2009) and the updated estimate of the reserves in the Mari field received from this company, the balance of the proven and developed gas reserves in the Mari field at December 31, 2009 amounts to 13.4 BCM. The balance of the updated proven gas reserves in the Mari and Noa fields as aforesaid, amounted to 19.6 BCM at December 31, 2009. It is also estimated that there are probable gas reserves in these fields, in the amount of 2 BCM, such that the balance of the proven and probable reserves at the reporting date amounts to 21.6 BCM.

C. Tamar and Dalit licenses

Delek Drilling and Avner each hold 15.6% of the Michal and Matan drilling licenses. Under these licenses, in 2008 drillings were conducted at Tamar 1, a deep sea offshore drilling west of Haifa.

In February 2009, the project operator, Noble Energy Ltd. ("Noble") announced that commercial quantities of gas were discovered in the drilling. Noble estimates that the economic potential of gas reserves at the Tamar formation at that time was BCM 142.

In April 2009, Noble started drillings at Tamar 2, to achieve a more accurate assessment of the gas reserves in the Tamar formation. In July 2009, Noble announced that according to the findings at the Tamar 2 drillings, the economic potential of gas reserves in the Tamar formation is BCM 178.

C-86 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 16 – INVESTMENTS IN OIL AND GAS EXPLORATION AND PRODUCTION (CONTD.)

C. Tamar and Dalit licenses (contd.)

In addition, in August 2009, Noble announced that according to an appraisal of an independent engineering consultation company (NSAI), the economic potential of the gas reserves in the Tamar formation is BCM 207. The natural gas reserves in the Tamar field, classified as proved and probable reserves (2P) upon confirmation of the development plan for the Tamar field (which will include a reasonable expectation for sale of the natural gas produced in the field), is estimated at 218 BCM. These gas reserves include natural gas reserves, which will be classified as proved reserves (P1) in the scope of 170 BCM.

Up to the reporting date, a total of $215 million has been invested in Tamar 1 and Tamar 2 (the share of Delek Drilling is $34 million).

On April 2, 2009, the joint partnership announced that the Petroleum Commissioner in the Ministry of National Infrastructures (“the Petroleum Commissioner”) confirmed the Tamar discovery as a commercial discovery. In view of the aforesaid, the Petroleum Commissioner approved the validity of the Matan license until December 2, 2009, in accordance with section 18(B) of the Petroleum Law. On December 3, 2009, the Commissioner granted a lease to the holders of the rights in the license. See below.

In addition, in March 2009, the partners started to drill at Dalit 1 in the area of the Michal license. The drilling site is 60 km west of the Hadera coast. In April 2009, Noble announced that the productions tests at the drilling were successful and commercial quantities of gas were discovered. Noble estimates that the mean potential of gas reserves at the Dalit structure is 14.2 BCM.

Noble announced that the Dalit 1 discovery, if found to be commercial, could be part of the initial stage of the Tamar development plan, which is currently in its preliminary formulation stages, and should enable supply of natural gas to the Israeli market by 2012.

In April 2009, the Petroleum Commissioner confirmed the Dalit 1 drilling as a commercial discovery. In view of the aforesaid, the Petroleum Commissioner approved the validity of the Michal license until December 2, 2009, in accordance with section 18(B) of the Petroleum Law. On December 3, 2009, the Commissioner granted a lease to the license holders. See below.

At the reporting date, a total of $57 million has been invested in the Dalit 1 drilling (the share of Delek Drillings is $9 million).

The Tamar and Dalit leases are issued pursuant to the Petroleum Law and grant the partners exclusive rights to produce oil and natural gas in the lease areas for 30 years, with an option for another 20 years pursuant to the provisions of the Petroleum Law.

It is noted that the estimates of Noble in respect of the future production rate and economic potential of the gas reserves are estimates which are as yet uncertain. These estimates are expected to be adjusted as additional information is gathered and/or as a result of a range of factors related to oil and gas exploration and production projects, including as a result of continued analysis of drilling findings and production tests and an assessment of the proven reserves.

In August 2009 and February 2010, the partnerships announced that they had given Noble approval to engage in agreements for the purchase of equipment and services, which may be required for development of the Tamar and Dalit natural gas fields, in a total amount of up to $457 million. The share of Delek Drilling is $71.4 million. These agreements refer mainly to equipment and services with a long-term supply time, and which will be supplied up to and including 2011. The operator informed the partners in the lease that the development costs of the Tamar field are based on the development plan, which at this stage is estimated (for 100% of the rights) at $2.8 billion (including a budget for unexpected expenses for the planning stage, which has not yet been completed, and for the establishment stage), in which all the partners in the project undertook $457 million, as aforesaid. It is clarified that the development budget has not yet been submitted for the approval of the partners in the lease. It is noted that at this stage, the development costs are estimates only, received from Noble, and there is no certainty as to the actual costs.

C-87 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 16 – INVESTMENTS IN OIL AND GAS EXPLORATION AND PRODUCTION (CONTD.)

C. Tamar and Dalit licenses (contd.)

In view of the estimates of the scope of costs, the development budget of the Tamar project requires Delek Drilling and Avner to raise substantial amounts to finance their share in the project. The partnerships, through their general partner, are negotiating with two foreign banks for a bridge loan, to finance part of the investments in the Tamar project, and which will be secured by a pledge on the project assets. The partnerships intend exchange the bridge loan with a long-term project loan. Binding agreements have not yet been signed with any of the banks and finances have not yet been raised from other sources. It is noted that approval of the income tax authorities is required in respect of raising the loans. The partnerships applied for approval, which has yet to be received. The total investment for development of the Tamar and Dalit natural gas fields, up to December 31, 2009, amounted to $34.1 million (of which the share of Delek Drilling is $5.3 million).

D. Seismic survey in the Ratio Yam, Alon and Ruth concessions

In August 2008, a 2-D seismic survey was performed in the areas of these preliminary permits, at a cost of $6 million. The share of the joint partnership is $1.4 million. Based on the 2-D seismic survey, potential prospects were mapped and an area was defined for 3-D seismic surveys. See below. On May 14, 2009, the joint partnership announced that the partners in the Ruth, Alon and Ratio Yam licenses (“the licenses”) approved a work plan for 3-D seismic surveys in the license areas, as follows:

Stage A of the work plan aims to cover potential prospects (leads) in part of the license areas. Part B of the work plan could cover additional areas in the license.

The operator, Noble, notified the partners that the 3-D seismic survey that commenced on September 26, 2009, was carried out by the seismic ship Vanguard of PGS Ltd., and was completed on December 15, 2009. The survey, including Stage A and part of Stage B of this work plan, covered 4,651 kilometers in the Amit, Rachel, David, Hannah and Eran licenses, which are Ratio Yam licenses, and in the Alon A and Alon B licenses, and in adjacent fields, in order to allow full technical cover of the areas in these licenses. The survey includes 853 kilometers in Block 12 in Cyprus and in adjacent areas in Israel. The cost of the 3-D seismic survey, processing of the data and the accompanying works in 2009 is $20 million. The share of Delek Drilling is estimated at $4.5 million. At the reporting date, information from the seismic survey are being processed and interpreted, following which preparation of drilling prospects will be examined. Initial data about possible prospects could be formulated in the first half of 2010. The rights of the joint partners in the Alon license is 26.4705%, in the Ruth license is 27.835%, and in the Ratio Yam license, 22.67%.

E. Oil and gas exploration off the shores of Vietnam

In April 2009, the National Petroleum Company of Vietnam announced that it will exercise its option to acquire 15% of the rights in the project in view of its declaration as commercial discovery. The consideration for acquisition of the rights will be calculated as the proportional part (15%) of the total costs investments in the project to date. After exercising the option, Delek Energy's holding in the project fell to 21.25%.

In addition, in July 2009, DES signed an agreement with Premier Oil (“Premier”) to sell its full holdings in Delek Vietnam. DES received $83.9 million for the sale of Delek Vietnam. This amount includes $72 million as well as amounts from PetroVietnam’s exercise of an option to buy 15% of the project and a refund of Delek Vietnam investments made subsequent to the effective date of the transaction (March 31, 2009). In addition to this amount, and subject to the conditions stipulated in the agreement, Premier agreed to pay DES $3 million one year after the start of commercial production from the Dua field, if and when that occurs. This amount is included in the financial statements at its present value of NIS 8 million, according to DES estimations of the expected production date. Premier also agreed to pay an additional amount of $7 million one year after the start of commercial production from other fields in Block 12 W (with the exception of Chim Sao and Dua fields, if and when that occurs). At this stage, and provided there are no discoveries in another field, DES does not record any revenue for Premier’s liabilities. The transaction is expected to generate a loss of NIS 4 million for DES.

C-88 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 16 – INVESTMENTS IN OIL AND GAS EXPLORATION AND PRODUCTION (CONTD.)

F. Oil and gas exploration and production in the USA

On February 11, 2008, the transaction was completed for acquisition of the full share capital of Elk Resources LLC (“Elk”), according to the agreements signed on January 14, 2008. Acquisition of the shares was carried out by Delek Energy Systems (Rockies) LLC (“Delek Rockies”), an affiliate wholly-owned by DES. In consideration for the acquisition of Elk, Delek Rockies paid an amount of $95.5 million, of which $17 million was used for the shares (including $0.5 million for working capital at the record date) and the balance to repay Elk's loan from a hedge fund in the USA. The acquisition of Elk was fully financed by a loan received by a Delek Rockies from the Bank of Scotland (“BoS”) in the amount of $100 million (“the loan”). The loan is a revolver loan at variable interest, for an inclusive period of up to 10 years. As collateral for repayment of the loan, the shares of Delek Rockies, assets and hedging transactions made by the subsidiary on oil and gas prices were pledged in favor of BoS. DES also placed guarantees in the amount of $30 million up to February 11, 2010 (under certain conditions, BoS will be entitled to require the replacement of the Company's guarantee with a financial guarantee. In addition, the Company undertook to provide Delek Rockies with any financing that may be required for the development plan for Elk for 2008-2010 and to indemnify BoS in the event of any material breaches in the Elk transaction, for a period of one year. The loan agreements includes numerous terms, including a provision that Delek Rockies complies with the financial relations, breach events and immediate payment, declarations, representations and so on. As part of the financing transaction, DES, made hedging transactions on oil and gas prices including put and call options, according to the requirements of the financing bank. The total cost of the transaction amounted to US$3.3 million. The fair value of the transaction at the reporting date is $2.4 million, and it is included in current and non-current assets under financial derivatives.

Elk is a private company registered in the USA. The company produces and sells oil and gas, develops existing oil and gas assets and conducts low-risk explorations for oil and gas. Elk has production and exploration rights covering an area of 215 km2 in Utah and New Mexico. As accepted in the industry, exploration and production rights are contingent on exploration and production operations. Elk's main asset is the Roosevelt field in northern Utah. Most of Elk's proven and developed reserves are in this field and this is where most of its oil production operations are conducted.

Elk is the operator of most of the assets and the drillings are conducted by external contractors. In 2008-2009, Elk engaged in significant development of oil wells and performed completion and development works of existing drillings, at an investment of $56 million, in order to significantly increase oil production. According to the reserve report of December 31, 2009, prepared by a foreign company, Elk's share in the proved reserves, less royalties, amounts to 9.2 million barrels of oil (of which, 1.9 million barrels in producing oil assets) and 2.5 BCF of natural gas (of which, 0.4 BCF in producing gas assets).

G. Gas supply agreements

1. Agreement with the Israel Electric Corporation for the supply of natural gas

On June 25, 2002, the partners in the Yam Tethys group entered into an agreement with the Israel Electric Corp. for the supply of natural gas to Israel Electric Corp. (the Agreement). According to the terms of the agreement, Yam Tethys group will provide natural gas to Israel Electric Corp. for a period of about 11 years or until such a time when Yam Tethys has provided to Israel Electric Corp. natural gas in the total amount of about 18 BCM, according to the terms set in the agreement. The financial scope of the transaction (for all partners) is estimated at $1.5 billion. The actual revenue of Yam Tethys group will be affected by a number of conditions, mainly global oil prices, the supply regime and the construction pace of the national natural gas pipeline and the actual quantity taken by the IEC, and they may be considerably lower than the estimate. The gas price set in the agreement was denominated in US dollars per British Thermal Unit (BTU), and is linked to the oil index and the US Producer Price Index according to the mechanism set forth in the agreement, with a maximum and a minimum price (see also Note 28 below for details of a transaction entered into for the fixation of the gas price).

C-89 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 16 – INVESTMENTS IN OIL AND GAS EXPLORATION AND PRODUCTION (CONTD.)

G. Gas supply agreements (contd.)

1. Agreement with the Israel Electric Corporation for the supply of natural gas (contd.)

On February 18, 2004, the joint venture began supplying natural gas to IEC facilities.

In August 2006, the partners in the Yam Tethys group signed an addendum to the agreement with IEC, according to which IEC was granted an option to purchase additional quantities of natural gas. The option is valid (after the extension) until March 31, 2009 and pertains to additional gas volumes purchased since July 2006 (in practice, the parties acted in accordance with the terms in the addendum to the extension agreement up to June 30, 2009). The price for gas purchased under the addendum to the agreement is higher than the price at which IEC purchases natural gas under the original agreement.

In August 2009, IEC and the Yam Tethys Group partners signed a memorandum of understanding for the supply of an additional 1 BCM of gas per year for five years (a total of 5 BCM). The financial scope of the agreement (for all partners) is estimated at $1 billion. The actual revenue of Yam Tethys Group from the sale of additional quantities to IEC will be affected by a number of conditions, mainly global fuel prices, supply schedule and other conditions.

See section 3(A) below regarding the letter of intents signed with IEC for the supply of the additional amounts of natural gas.

2. Other agreements

At December 31, 2009, the partners in the Yam Tethys group have entered into agreements for the supply of natural gas to several parties (including Delek Ashkelon, (a subsidiary), Paz Ashdod Refinery, Hadera Paper Ltd. and Dead Sea Works) for periods ranging between 5 and 15 years totaling 4.7 BCM and at an estimated financial scope of $500 - 550 million. The actual revenue will be affected by a number of conditions, as set forth in the agreements.

3. Letters of intent for supply of natural gas

A. Letters of intent with IEC

On December 24, 2009, IEC and the Yam Tethys partners and Michal Matan partners signed a letter of intent for the supply of natural gas for 15 years, in an annual scope of at least 2.7 BCM and an estimated financial scope of $400 million to $750 million. The actual revenue will be affected by a number of conditions. In accordance with another letter of intent signed by IEC and the partners in the Yam Tethys project, IEC will negotiate for the acquisition of strategic inventory of natural gas and the acquisition of storage and transportation service for the gas purchased from the Mari field.

A third letter of intent was also signed by the partners in the Yam Tethys project and the partners in the Tamar project, according to which the strategic inventory will be supplied by the Michal Matan project, subject to the agreement between the partners in both projects.

B. Additional letters of intent

1. In December 2009, Dalia Energies and the partners in the Michal Matan project signed a letter of intent for the supply of natural gas over 17 years, as from the commencement of operation of the power station, in a total quantity of 5.6 BCM and an estimated financial scope of at least $1 billion. The actual revenue will be affected by a number of conditions.

C-90 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 16 – INVESTMENTS IN OIL AND GAS EXPLORATION AND PRODUCTION (CONTD.)

G. Gas supply agreements (contd.)

3. Letters of intent for supply of natural gas (contd.)

B. Additional letters of intent (contd.)

2. Subsequent to the reporting date, in February 2010, Darom Power Station and Dimona Silica and the partners in the Michal Matan project signed a letter of intent for the supply of natural gas for 17 years, in a total scope of 2.8 BCM and an estimated financial scope of $0.5 billion. The actual revenue will be affected by a number of conditions.

It is noted that notwithstanding the aforesaid in section A and B above, there is no certainty that binding contracts will be signed under said terms or under other terms, and there is no certainty that the supply quantity and financial scope of the agreements will be as estimated above if a binding contract is signed.

4. Establishment of the national natural gas pipeline

The Social-Economic Cabinet of the Government of Israel approved principles for the financing, construction and operation of the national natural gas pipeline, following the failure of the tender for establishment of the system. The approved principles set the segments of the system that will be constructed by IEC and the preconditions for approval, as well as the establishment of a governmental gas company for planning, supervising, constructing and operating the system. The government company that was established Israel Natural Gas Lines Ltd. ("INGL"), commenced the construction of the land pipeline in 2005.

The ability of the Yam Tethys project partners to sell their gas to other potential consumers and to increase the gas volume supplied to IEC is dependent, inter alia, on establishment of the national gas pipeline, which has yet to be completed at the reporting date.

5. Royalties to the State and others

The Commissioner of Petroleum Affairs in the Ministry of National Infrastructures informed the Yam Tethys joint venture that the State has decided not to take the royalties it is entitled to (in kind) from gas discoveries, but rather to take the market value of the royalties per well in US dollars.

The method for calculating the royalties due to the State was agreed according to the Commissioner of Petroleum Affairs' announcement dated July 19, 2004 and to a summary of a discussion held with the Commissioner. According to the agreements, the financial statements include royalty payments to the State, representing 10.9% (in 2008, 10.5%; in 2007, 10.6%) of the gross sales of the joint transaction. The method for calculating the royalties is used also to calculate the market value per well of the super royalties paid to the companies in the Group and to others.

C-91 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 17 – PROPERTY, PLANT AND EQUIPMENT

A. Composition and movement:

2009 Computers, Machinery, furniture and Pumps, tanks Land and Leasehold facilities and office and station Refinery buildings improvements equipment equipment equipment plants Works of art Vehicles Total NIS millions

Cost Balance at January 1, 2009 3,490 343 540 578 2,177 1,155 80 103 8,466 Additions during the year 280 92 109 61 90 607 - 9 1,248 Adjustments for translation of financial statements of 6 2 (8) - 15 (14) - - 1 Additions for a company consolidated for the first time - - - 36 - - - - 36 Deconsolidation (149) (4) (1) (9) - - - (2) (165) Transfer between groups 37 (148) - - 111 - - - - Adjustments for attribution to excess cost - - - - 15 - - - 15 Removals during the year (69) (4) - (12) (41) (19) (4) (8) (157)

Balance at December 31, 2009 3,595 281 640 654 2,367 1,729 76 102 9,444

Cumulative depreciation Balance at January 1, 2009 547 113 170 372 828 126 - 62 2,218 Additions during the year 94 28 17 54 153 102 - 11 459 Adjustments for translation of financial statements of 1 1 - - 1 (5) - - (2) Additions for a company consolidated for the first time - - - 18 - - - - 18 Deconsolidation (36) (3) (1) (7) - - - (1) (48) Removals during the year (9) (1) - (11) (20) (1) - (6) (48)

Balance at December 31, 2009 597 138 186 426 962 222 - 66 2,597

Reduced balance for 31 December 2009 2,998 143 454 228 1,405 1,507 76 36 6,847

Less - provision for impairment 17 - - - 30 - 2 - 49

Reduced balance for 31 December 2009 2,981 143 454 228 1,375 1,507 74 36 6,798

C-92 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 17 – PROPERTY, PLANT AND EQUIPMENT (CONTD.)

A. Composition and movement: (contd.)

2008 Computers, Machinery, furniture and Pumps, tanks Refinery Land and Leasehold facilities and office and station plants buildings improvements equipment equipment equipment Refinery Works of art Vehicles Total NIS millions Cost Balance at January 1, 2008 6,756 286 387 1,156 1,980 863 82 99 11,609 Additions during the year 181 114 153 46 130 295 - 12 931 Adjustments for translation of financial statements of (35) - - (1) (37) (2) - - (75) Additions for a company consolidated for the first time 309 1 - 12 138 - - 1 461 Transfer to investment property (3,564) - - (632) - - - - (4,196) Assets held for sale (86) ------(86) Adjustments for attribution to excess cost (5) - - - (21) - - - (26) Removals during the year (66) (58) - (3) (13) (1) (2) (9) (152)

Balance at December 31, 2008 3,490 343 540 578 2,177 1,155 80 103 8,466

Cumulative depreciation Balance at January 1, 2008 562 101 153 767 715 62 - 56 2,416 Additions during the year 124 33 17 52 124 64 - 11 425 Adjustments for translation of financial statements of (3) - - - (2) - - - (5) Additions for a company consolidated for the first time 20 ------20 Transfer to investment property (113) - - (445) - - - - (558) Assets held for sale (31) ------(31) Removals during the year (12) (21) - (2) (9) - - (5) (49)

Balance at December 31, 2008 547 113 170 372 828 126 - 62 2,218

Reduced balance for 31 December 2008 2,943 230 370 206 1,349 1,029 80 41 6,248

Less - provision for impairment 17 - - - 30 - 2 - 49

Reduced balance for 31 December 2008 2,926 230 370 206 1,319 1,029 78 41 6,199

C-93 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 17 – PROPERTY, PLANT AND EQUIPMENT (CONTD.)

B. Capitalized credit costs

December 31 2009 2008 NIS millions

70 54

C. See Note 34 for liens.

C-94 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 18 – DEFERRED ACQUISITION EXPENSES IN INSURANCE COMPANIES

A. Composition:

December 31 2009 2008 NIS millions

Life assurance and long-term savings 642 697 Health insurance 106 96 General insurance 296 334

1,044 1,127

Stated in the balance sheet as follows: December 31 2009 2008 NIS millions

Current assets 364 390 Non-current assets 680 737

1,044 1,127

B. Change in deferred acquisition costs in life assurance and long-term savings:

NIS millions

Balance at January 1, 2008 688

Additions Acquisition commissions 76 Other acquisition costs 62 Total additions 138 Current write off (62) Write-off for cancellations (67)

Balance at December 31, 2008 697

Additions Acquisition commissions 66 Other acquisition costs 64 Total additions 130 Current write off (68) Write-off for cancellations (117)

Balance at December 31, 2009 642

NOTE 19 – ADVANCE EXPENSES (PRIMARILY FOR OPERATING LEASE)

Some of the buildings and facilities of the Group companies are on land leased from the Israel Land Administration. Leases are generally for a period of 49 years, ending between 2019-2056, with an option to extend the lease for another 49 years. On December 31, 2009, the amounts attributable to the leases are NIS 408 million, amortized over the period of use of the rights, taking into account the options period.

C-95 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 20 – STRUCTURED BONDS

At December 31, 2009, the balance of the structured bonds amounts to NIS 1.131 billion (NIS 258 million recognized in short-term investments).

The structured bonds were issued through special purpose companies that engage exclusively in issuing debentures and handling assets mortgaged in favor of the debenture holders (“Heharim companies”) The issuing companies are special purpose companies (“SPC”), which were set up for the sole purpose of issuing debentures and these companies may not engage in any other commercial activity. The SPC acquires non-marketable structured bonds (“notes”) from the proceeds of the issuance, which constitute the sole source of repayment of the liabilities of the Heharim companies (non-recourse liabilities).

At December 31, 2009, there are nine series of structured bonds: seven are listed on the TASE and two were issued in private offerings. Most of the structured bonds are traded on the TASE and have been rated by Maalot - the Israel Securities Rating Company Ltd. (“Maalot”) at AA-AAA. In 2009, a number of Heharim companies carried out early redemption and full early redemption of bonds amounting to NIS 1.22 billion, par value, under the terms of the prospectuses.

The fair value of the notes backing up the negotiable structured bonds at December 31, 2009, based on the market price of the negotiable debenture as at the balance sheet date is NIS 1.120 billion.

NOTE 21 – GOODWILL AND OTHER INTANGIBLE ASSETS

A. Composition:

Marketing, rights, brands, franchises and Value of customer insurance Goodwill portfolios Software portfolios *) Other Total NIS millions

Balance at January 1, 2008 3,062 411 320 634 53 4,480 Additions 28 71 99 24 - 222 Companies consolidated for the first time 177 317 13 - 15 522 Impairment (173) - - (77) - (250) Amortization recognized during the year - (62) (46) (70) (5) (183) Adjustments for translation of financial statements of foreign operations (221) (22) - (1) (9) (253)

Balance at December 31, 2008 2,873 715 386 510 54 4,538

Deconsolidation (749) - - - (15) (764) Additions 550 59 119 4 - 732 Companies consolidated for the first time 594 198 - - - 792 Impairment (37) (16) - - - (53) Amortization recognized during the Year - (161) (51) (63) (8) (283) Updated excess cost (47) - - - - (47) Adjustments for translation of financial statements of foreign operations 58 13 - - 6 77

Balance at December 31, 2009 3,242 808 454 451 37 4,992

(* See also section B(1) below.

C-96 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 21 – GOODWILL AND OTHER INTANGIBLE ASSETS

B. Impairment of goodwill and intangible assets with a defined useful life

To assess impairment of goodwill and intangible assets with a defined useful life, goodwill and the value of insurance portfolios were attributed to operating segments, as follows:

Value of insurance Goodwill portfolios December 31 2009 2008 2009 2008 NIS millions

Insurance and finance in Israel 1) 1,523 445 350 399 Fuel operations in Israel (2) 318 318 - - Insurance abroad (3) 455 450 - - Gas stations and convenience stores in the 227 250 USA (4) - - Gas stations and convenience stores in 633 662 Europe (5) - - Other segments 86 53 - - Real estate (6) - 695 - -

Total 3,242 2,873 350 399

(1) Goodwill of NIS 311 million and the value of the insurance portfolios in Israel with a balance of NIS 350 million at December 31, 2009, were created by acquisition of control of Phoenix in 2006. Examination of impairment of goodwill and value of insurance portfolios is based, inter alia, on the assessment of an independent, external assessor. In the valuation, part of the goodwill and value of insurance portfolios for life assurance and general insurance activity were attributed to cash-producing units. The goodwill that cannot be attributed specifically was examined on the level of the entire sector.

The recoverable amount of the life assurance unit is calculated on the basis of the embedded value, using the discount rate reflecting the level of risk in the relevant cash flows. Calculating the embedded value is based on discounting the future cash flows arising from the life assurance portfolio less the cost of capital required and with the Company’s equity after a number of adjustments. In addition, the valuation took into account the value of new businesses (VNB).

The recoverable amount of general insurance is based on the value of use calculated by discounting the expected future cash flows using the discount rates that reflect the risk level of the operation.

Following the examination, the Company reached the conclusion that in 2009, goodwill and the value of the insurance portfolios were not impaired.

Goodwill amounting to NIS 134 million was attributed to the activity of insurance agencies and financial consultation with a recoverable amount based on discounted cash flows and the “profit factor” method. In 2009, impairment of goodwill of NIS 10 million was included for these operations.

The goodwill balance in this segment is due to business combinations in 2009 (for the acquisition of Excellence and Prisma, see Note 14H).

(2) Goodwill for fuel operations in Israel was attributed by Delek Israel mainly to fuel storage and production operations. The balance at December 31, 2009 amounts to NIS 318 million. The recoverable amount of the fuel storage and distribution unit was based on discounting the future cash flows expected to be received from it. To determine the recoverable amount, the pre-tax discount rate used was 9.3% and the cash flow forecasts took into account annual growth of 1.5-2%.

C-97 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 21 – GOODWILL AND OTHER INTANGIBLE ASSETS

B. Impairment of goodwill and intangible assets with a defined useful life

(3) In 2009, Delek Finance examined the recoverable amount of goodwill based on the discounted expected future cash flows and method of comparisons with similar companies in the sector, taking discount rates that reflect the level of risk of the operations. Following the examination, the Company reached the conclusion that in 2009, goodwill attributable to insurance abroad was not impaired.

(4) The balance is attributable to gas station and convenience store operations in the United States. The recoverable amount was based on various valuation techniques, including use of multiples and discounted future cash flows. In the reporting period, Delek USA recognized impairment of goodwill amounting to $7 million (NIS 27 million).

(5) The goodwill is attributed to gas stations and convenience stores in Europe. Impairment is based on the value of the use, using the following parameters: discount rate of 8.04%, inflation rate of 1.5%, representative predicted cash flows for five years including negative growth of 1- 2% and a growth rate of 1% from 2015 onwards.

In the reporting period, Delek Benelux recognized a tax asset for losses for transfer that was not recognized when acquiring the European fuel operations in August 2007. As a result, Delek Benelux recognized expenses for amortization of goodwill amounting to NIS 42 million, recognized under administration and general expenses. On the other hand, Delek Benelux recognized deferred tax revenues in the same amount. In the reporting period, impairment was not recognized for goodwill.

(6) The balance at December 31, 2008 refers to the goodwill at Delek Real Estate, whose shares were distributed as a dividend in kind to the shareholders of the Company in 2009.

C-98 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 22 – SHORT-TERM CREDIT FROM BANKS, NET

A. Composition:

Annual December 31 interest (1) 2009 2008 % NIS millions From banks

Foreign currency

US dollar or dollar linked 2.1 429 720 Euro 2.9 432 385 Others 3.4 145 339

1,006 1,444 NIS

CPI linked 3.4 241 - Unlinked 3.5 789 2,291

1,030 2,291 From others

Convertible securities

Unlinked 2.1 77 - CPI linked 6 19 Linked to the euro 1 34

84 53 Current maturities of debentures convertible to company shares - 1 Current maturities of debentures convertible to shares of subsidiaries - 98 Current maturities of other debentures 831 714 Current maturities of long-term debt 790 2,267

1,621 3,080

3,741 6,868

(1) Most of the loans bear interest at variable rate. The rate presented is a weighted average as of December 31, 2009.

B. See Note 26(C) for compliance with financial covenants.

C. See Note 34 for collateral.

C-99 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 23 – TRADE PAYABLES

December 31 2009 2008 NIS millions Primarily open accounts In foreign currency or linked thereto 2,733 1,602 In NIS 146 299

2,879 1,901

Trade payables do not bear interest. The average number of credit days for trade payables is EOM + 30.

NOTE 24 – OTHER PAYABLES

December 31 2009 2008 NIS millions

Institutions 1,118 802 Prepaid revenue 194 310 Advance payments from customers 139 533 Salaries and incidentals 218 138 Dividend and earnings to a minority in subsidiaries and partnerships 54 11 Transactions in oil and gas exploration 75 69 Interest to be paid 182 288 Liabilities to employees for reorganization - 92 Deferred purchase expenses for reinsurance 31 27 Insurance companies and insurance agents 274 254 Liabilities to insurance agents 136 133 Provision for an onerous contract - 167 Liability for acquisition of subsidiary shares from a non-controlling interest 103 7 Payables for structured bonds 174 - TASE clearing house 85 - Others and accrued expenses 757 662

3,540 3,493

C-100 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 25 –- EXCHANGE-TRADED FUNDS AND DEPOSITS

December 31 2009 2008 NIS millions

Exchange traded funds and deposit (1) 15,181 - Current maturities of structured bonds 258 - Liability for short sale of securities 200 -

15,639 -

(1) Details of exchange-traded funds

A. Excellence owns special purpose companies (“SPCs”) that issue exchange traded funds and deposits listed on the TASE. In this framework, the Company issues exchange traded funds (“ETFs”) that track share, commodity and sector indexes, reverse certificates for share indexes and covered warrants for indexes and commodities (“the certificates”). The issuing companies are SPCs that were set up to issue ETFs, commodity certificates and reverse certificates, and other securities approved by the board of directors of the TASE.

ETFs were issued by companies that engage exclusively in issuing ETFs and handling assets pledged in favor of the debenture holders. The certificates accurately track an index and is convertible into shares or at a financial value according to the reference index determined for that certificate. The certificates are backed by underlying assets that produce the yields of various share and goods indexes. Of the proceeds of the issuance, the companies deposit sums in accounts (banks or financial institutes) and underlying assets and/or financial instruments and derivatives that will be acquired to fulfill their obligations towards the debenture holders. The rights of the debenture holders will be exercised out of the net proceeds received from the companies from the pledged assets. Up to December 31, 2009, 116 certificates were issued.

B. Deposit certificates were issued by companies that engage exclusively in issuing deposit certificates and handling assets that are pledged in favor of the deposit holders. Deposit certificates are linked (principal and interest) to the rate of exchange for a variety of currencies against the Israeli shekel and they bear interest. Each of the deposit certificate companies is an SPC which was set up for the sole purpose of issuing deposit certificates and these companies they may not engage in any other commercial activity. The companies make bank deposits from the proceeds of the issuance to secure their liabilities towards the holders of the deposit certificates. The rights of the companies in the backup deposits are the sole source of repayment for obligations to the holders of the certificates of deposit. The certificates of deposit are rated at different ratings from AA-AAA+. The rating is based, inter alia, on the rating of the banks in which the deposits are placed. Up to December 31, 2009, 8 deposit certificates were issued.

C. Composition of the exchange traded funds

December 31 2009 2008 NIS millions

Host contract (*) 12,803 - Embedded derivative (**) 2,378 -

15,181 - (* Measured at reduced cost (** Measured at fair value through profit or loss

C-101 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 25 –- EXCHANGE-TRADED FUNDS AND DEPOSITS (CONTD.)

D. Additional details about the composition of assets and liabilities of SPCs as at December 31, 2009

Israel Sector Foreign share share share Commodit Exchange Debenture indexes indexes indexes y indexes rates indexes NIS millions

Backed up assets, net *) 7,247 171 3,365 376 422 3,858 Certificates 7,202 169 3,330 373 410 3,838

45 2 35 3 12 20

*) Less credit and credit balances and less liabilities for options for short sale of securities

NOTE 26 – LOANS FROM BANKS AND OTHERS

A. Composition and terms:

Annual interest December 31 (1) 2009 2008 % NIS millions Loans from banks: US dollar or dollar linked 4.6 3,141 3,214 Pound sterling - 3,734 Euro or linked thereto 5.2 1,631 4,962 Linked to the CPI 5.2 511 964 Unlinked 3.3 249 677 Other currencies 6.1 102 2,246 Commercial securities - unlinked - 155

5,634 15,952 Loans from others – foreign currency 6.2 317 546

5,951 16,498 Less - current maturities (790) (2,267)

5,161 14,231

(1) Most of the loans bear interest at variable rate. The presented is a weighted average at December 31, 2009

B. Settlement dates: December 31 2009 NIS millions

First year – current maturities 790 Second year 1,532 Third year 1,167 Fourth year 200 Fifth year 347 Six year and onwards 1,915

5,951

C-102 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 26 – LONG TERM LOANS FROM BANKS AND OTHERS (CONTD.)

C. Additional details

1. In December 2009, the Company and Delek Investments entered into an agreement with a bank in respect of a loan with a balance of NIS 724 million at December 31, 2009. Pursuant to the agreement, the financial covenants determined in prior agreements were annulled and new covenants were established, as follows:

− The Company and Delek Investments have undertaken that the total guarantees that they will provide, as defined in the loan agreement will not exceed NIS 1.5 billion.

− The Group and Delek Investments are required to maintain certain financial ratios derived from the value of assets in relation to the total liabilities of the companies.

The Company undertook that the total divided to be declared will not exceed a certain percentage of the net profit attributable to the Company’s shareholders.

At December 31, 2009, the Company is in compliance with these financial covenants.

2. In respect of loans from banks and others, the balance of which as of December 31, 2009 is NIS 8 billion, certain subsidiaries have undertaken to meet certain financial covenants, mainly in respect of the amount of their equity, the ratio of credit to balance sheet total, the ratio of equity to balance sheet total, the financial debt and debt coverage. As at the balance sheet date, the subsidiaries are in compliance with the aforementioned financial covenants. In addition, some of the companies undertook towards the banks that as long as the loans are not repaid in full, they will refrain from distributing a dividend exceeding a specific percentage of their net earnings.

D. See Note 34 for collateral.

NOTE 27 – DEBENTURES CONVERTIBLE INTO SHARES OF SUBSIDIARIES

The debentures are linked to the CPI and were issued in the following companies:

December 31 2009 2008 NIS millions

Delek Real Estate - for conversion to Delek Real Estate shares - 161 For conversion to Gadot shares - 44

- 205 Less - current maturities - (98)

- 107

C-103 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 28 – OTHER DEBENTURES

A. Composition:

Weighted Weighted effective interest rate Balance interest December 31 December 31 rate 2009 2009 2008 % % NIS millions

CPI-linked debentures Debentures issued by the Company 3.9 3.9 4,511 4,415 Debentures issued by subsidiaries 5.3 5.2 4,345 5,005 Unlinked debentures issued by the Company 7.6 7.6 1,482 - Unlinked debentures issued by subsidiaries 6.6 6.5 439 566 Dollar-linked debentures issued by subsidiaries 4.3 4.1 756 611

11,533 10,597 Less - current maturities (831) (545)

10,702 10,052

B. Additional details

1. On May 6, 2009, Delek Israel issued, in a private offering to classified investors, NIS 106,813,539 par value Debentures (Series A) of NIS 1 par value each in consideration of NIS 111 million ("the additional debentures”). The additional debentures are from the same series of NIS 760,000,000 Debentures (Series A) (the original debentures) that were issued under Delek Israel’s prospectus of August 5, 2007. The terms of the additional debentures are the same as the terms of the existing debentures.

2. In June 2009, Delek Israel issued NIS 474,000,000 par value Debentures (Series A) for NIS 527 million and NIS 287,000,000 par value Debentures (Series B) for NIS 287 million. The Debentures (Series A) are from the same series as the NIS 760,000,000 Debentures (Series A) that were issued under Delek Israel’s prospectus of August 5, 2007 (see also section 7 above). The terms of the additional debentures are the same as the terms of the existing debentures. Debentures (Series B) are unlinked and bear variable annual interest based on the annual interest of 817 Government Bonds with the addition of an annual margin of 3.6%, payable every three months on August 31, November 30, February 28 and May 31 of each year, commencing on August 31, 2009, and up to the date of the final payment on May 31, 2014. Debentures (Series B) are payable in three equal annual payments on May 31 of each of the years 2012- 2014.

3. In May 2009, S&P Maalot announced the downgrading of Debentures (Series A, E-M, V and W) issued by the Group to A from AA with stable outlook. At this date, Midroog rating company announced a rating of A1 for Debentures (Series E-M, V and W) issued by the Company.

4. In July 2009, the Company issued, in a private offering to classified investors, NIS 293,220,657 par value registered Debentures (Series W) of NIS 1 par value each in consideration of NIS 308 million ("the additional debentures”). The additional debentures are from the same series of NIS 1,000,000,000 Debentures (Series W) that were issued under the Group’s prospectus of May 30, 2007. The terms of the additional debentures are the same as the terms of the existing debentures.

C-104 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 28 – OTHER DEBENTURES (CONTD.)

B. Additional details (contd.)

5. In July 2009 the Company exchanged unlisted Debentures (Series K) and Debentures (Series L). In the framework of the conversion, the Company holds Debentures (Series K) at a total par value of NIS 110,563,495 in consideration of 119,234,168 par value Debentures (Series N), and debentures from holders of Debentures (Series L) at a total par value of NIS 504,270,791 in consideration of 548,008,266 par value Debentures (Series O). The terms and payment dates of the new debentures are the same as those of Debentures (Series K) and Debentures (Series L), respectively, with the exception of linkage to the index, which was cancelled and the interest, which was adjusted to 8.5% (annual interest) for the two new debenture series. Replacement of the debentures was subject to listing the new debentures for trading by September 17, 2009.

On September 15, 2009 (following the shelf prospectus issued by the Company), Debentures (Series N) and Debentures (Series O) were listed for trading.

In the opinion of the Company, the exchange of the CPI-linked debentures for new unlinked debentures constitutes a material change in the terms of the debentures in this case, as defined in IAS 39. Therefore, this debenture exchange was accounted for in the financial statements as payment of the liabilities for the old debentures and new recognition of the liability for the debentures that were issued. The Group recorded a profit of NIS 38 million from this exchange (before the impact of tax), recognized in finance revenue.

6. In September 2009, the Company issued the following:

a) NIS 260,000,000 par value registered Debentures (Series P) and Option Warrants (Series 6) exercisable into 260,000,000 Company shares of par value NIS 1 each.

Debentures (Series P) are listed for trading, unlinked (principal and interest) to any index, and are payable in four unequal annual payments: three payments of 16.667% of the principal are each payable on September 1st of each of the years 2012 to 2014 and the remaining 50% of the principal is payable on the last payment date, which is September 1, 2015 (inclusive). Debentures (Series P) bear annual interest of 5.5%, payable twice a year on March 1st and September 1st of each year, commencing from March 1, 2010 and until the last payment date on September 1, 2015.

Registered option warrants (Series 6) are exercisable into 260,000 Company shares of NIS 1 par value such that commencing from the listing date and until September 9, 2011, each Option Warrant (Series 6) will be exercisable for an exercise price of NIS 890, and commencing from September 10, 2011 and until September 9, 2013, for an exercise price of NIS 950. Option Warrants (Series 6) that are unexercised by October 10, 2013 will expire. The exercise price is not adjusted to any index or currency, however it is subject to adjustments for distribution of a dividend and so on.

The total consideration for the issuance amounted to NIS 263 million, of which NIS 238 million is attributable to Debentures (Series P) and the remaining NIS 25 million is attributable to Option Warrants (Series 6).

b) 90,000,000 par value registered Debentures (Series Q). Debentures (Series Q) are unlinked (principal and interest) to any index and payable in four unequal annual payments: three payments of 16.667% of the principal are each payable on September 1st of each of the years 2012 to 2014 and payment of the remaining 50% of the principal is payable on the last payment date, which is September 1, 2015 (inclusive). Debentures (Series R) bear variable quarterly interest based on the annual interest of 817 Government Bonds with the addition of an annual margin of 2.85%. Interest on the debentures is payable every three months on December 1st, March 1st and June 1st of each year commencing from December 1, 2009 and until the last payment date on September 1, 2015.

The total consideration for the issuance amounted to NIS 90 million.

On September 6, 2009, Midroog Ltd. (“Midroog”) confirmed the validity of A1 rating with stable outlook for these debentures.

C-105 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 28 – DEBENTURES (CONTD.)

B. Additional details (contd.)

7. In October 2009, DES issued debentures at a par value of NIS 300,000,000 (Series C), linked to the CPI, bearing annual interest of 5.5% and payable in 2012-2015. To secure the payment of these debentures, DES pledged participating units of Delek Drilling and Avner limited partnerships. The debentures were listed on the TASE.

8. In November 2009, the Company issued the following:

a) An additional 500,000,000 par value Debentures (Series O) by way of expansion of Debentures (Series O). These debentures are listed for trading. The consideration of the issuance amounted to NIS 521 million (after offsetting issuance expenses of NIS 4 million).

b) NIS 300,000,000 par value Debentures (Series R) in consideration for their par value. CPI- linked Debentures (Series R). These debentures are listed for trading. Issuance expenses amounted to NIS 3 million. Debentures (Series R) are payable in six equal annual payments on October 31st of each of the years 2016 and 2017 and 2019 to 2022 (inclusive) and bear fixed annual interest of 6.1%. The interest on the debentures is payable twice a year on April 30th and October 31st of each year commencing from April 30, 2010 until their last payment date on October 31, 2022 (inclusive). The consideration of the issuance amounted to NIS 297 million (after offsetting issuance expenses of NIS 3 million).

On October 27, 2009, Midroog announced a rating of A1 with stable outlook for these debentures.

9. Under the prospectus to raise capital that was issued on August 31, 2009, The Phoenix Capital Raising (a wholly-owned subsidiary of The Phoenix) issued 500 million registered Debentures (Series A) of NIS 1 par value each, in consideration for their par value, payable (principal) in three equal annual payments. The Debentures (Series A) are payable on September 1st of each of the years 2016 to 2018 (inclusive), linked (principal and interest) to the CPI that was published for July 2009 and bear annual interest of 4.4%, payable twice a year on March 1st and September 1st of each of the years 2010 to 2018. Furthermore, Maalot rated the subordinated Debentures (Series A) that The Phoenix Capital Raising issued to the public at ilAA-/Negative.

10. Subsequent to the balance sheet date, in January 2010, DES issued two debenture series in a scope of NIS 190 and NIS 210, respectively. The first series is linked to the CPI and bears annual interest of 5.15%, The second series bears annual interest of 7.19%. The debentures are repayable in 2013-2019. As full and accurate collateral for the terms of the debentures, DES pledged in favor of the trustee of the debentures participation units of Delek Drilling and Avner in a ratio defined in the deed of trust of the debentures.

C-106 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 28 – OTHER DEBENTURES (CONTD.)

C. Repayment dates after the balance sheet date

December 31 2009 NIS millions

First year – current maturities *) 831

Second year 1,192 Third year 1,353 Fourth year 1,484 Fifth year 2,355 Six year and onwards 4,318

11,533

NOTE 29 – FINANCIAL INSTRUMENTS

A. Financial risk factors

The Group's activities expose it to various financial risks, such as market risk (including currency risk, CPI risk, interest risk, and price risk), credit risk and liquidity risk. The Group's comprehensive risk management plan focuses on measures to minimize possible negative effects on the financial performance of the Group. The Group uses derivative financial instruments to hedge against exposure to certain risks. See section F below for financial risks of insurance companies.

1. Exchange rate risk

The Group is exposed to exchange rate risk due to exposure to various currencies, such as the dollar, euro, and yen. The exchange rate risk is due to future commercial transactions (including purchase of goods in foreign currency), recognized assets and liabilities denominated in foreign currency other than the functional currency and net investments in foreign operations.

The Group companies enter into transactions involving derivative financial instruments, from time to time, such as future transactions and option contracts to hedge their exposure to fluctuations in the exchange rates.

As of the balance sheet date, subsidiaries were involved in the following open transactions:

Scope of transactions NIS millions Agreements for forward transactions

Purchase of dollar for shekel 21 Purchase of Japanese yen for shekel 10 Sale of shekel for euro 29

C-107 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 29 – FINANCIAL INSTRUMENTS (CONTD.)

A. Financial risk factors (contd.)

1. Exchange rate risk (contd.)

Scope of transactions NIS millions Foreign currency options purchased Purchase of Japanese yen for shekel 73 Purchase of cap for euro 7 Purchase of dollar for shekel 773 Purchase of euro for dollar 109 Purchase of euro for shekel 295 Purchase of dollar for euro 11 Purchase of dollar for Japanese yen 68

Foreign currency options written Purchase of shekel for dollar 479 Purchase of Japanese yen for dollar 49 Purchase of shekel for euro 324 Purchase of dollar for euro 162 Purchase of shekel for Japanese yen 167 Purchase of Japanese yen for euro 54

2,631

The fair value of the transactions and their carrying amount as at December 31, 2009 reflect a net liability of NIS 16 million.

Most of the transactions are for a period of up to one year, and are not recognized as hedging transactions for accounting purposes.

Profit (loss) from the change 2009 2008 Increase of Decrease Increase of Decrease 5% of 5% 5% of 5% Risk factor NIS millions

NIS/USD exchange rate (20) 19 (21) 18 NIS/EUR exchange rate (16) (15) (11) 11 NIS/JPY exchange rate (49) (48) (19) 19 NIS/GBP exchange rate 1 (1) 8 (8) NIS/other currency exchange rate 1 (1) (29) 29 Foreign currency/foreign currency exchange rates 2 (1) (11) 11

2. CPI risk

The Group has bank loans and debentures linked to changes in the CPI. In addition, the Group has extended loans that are linked to changes in the CPI.

An increase of 1% in the CPI will result in a loss of NIS 148 million (in 2008, NIS 86 million) and a decrease of 1% in the CPI will lead to an similar profit.

C-108 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 29 – FINANCIAL INSTRUMENTS (CONTD.)

A. Financial risk factors (contd.)

3. Credit risk

The Group holds cash and cash equivalents, short- and long-term investments and other financial instruments in various financial institutions in Israel and abroad on the highest level.

The trade receivables balance in the automotive sector derives mainly from a number of leasing companies. The Company extends credit to these companies without specific collateral. At the beginning of 2009, the credit terms for some of the leasing companies were changed such that the credit period for sales in 2009 was extended significantly compared to the period up to that date. For these customers, the vehicles sold were pledge in favor of Delek Automotive, however some of the customers pledged their rights to receive moneys for leasing these vehicles.

For credit risks in the insurance sector, see section F below.

The revenues of the other companies in the Group originate from a large number of customers. The subsidiaries assess trade receivables regularly and the financial statements include provisions for doubtful debts which properly reflect, in the estimate of the subsidiaries, the loss in debts for which collection is uncertain.

4. Liquidity risk

The table below presents the repayment dates of the Group’s financial liabilities in accordance with the contractual terms, undiscounted.

31 December 2009

Up to 1 1-2 2-3 3-4 4-5 Over 5 year years years years years years Total NIS millions

Short-term credit 1,678 - - - - - 1,678 Long-term loans from banks 982 1,458 692 166 489 2,155 5,942 Trade payables 2,896 - - - - - 2,896 Tax and other payables 1,545 - - - - - 1,545 Other debentures 983 1,365 1,439 1,708 1,307 4,983 11,785 Derivative instruments 33 16 30 - - 87 166

8,117 2,839 2,161 1,874 1,796 7,225 24,012

C-109 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 29 – FINANCIAL INSTRUMENTS (CONTD.)

A. Financial risk factors (contd.)

4. Liquidity risk

31 December 2008

Up to 1 1-2 2-3 3-4 4-5 Over 5 year years years years years years Total NIS millions

Short-term credit 3,798 - - - - - 3,798 Long-term loans from banks 3,456 2,812 3,415 2,003 2,229 7,871 21,786 Trade payables 1,901 - - - - - 1,901 Tax and other payables 3,801 - - - - - 3,801 Convertible bonds 110 60 57 - - - 227 Other debentures 1,135 1,114 1,403 1,304 7,455 - 12,411 Derivative instruments 171 - - - - 1,218 1,389

14,372 3,986 4,875 3,307 9,684 9,089 45,313

5. Interest rate risk

The Company and investees has shekel loans at variable interest, therefore the Company is exposed to changes in interest rates in Israeli banks. Some of the Group companies took loans at variable interest at foreign interest rates, therefore they are exposed to changes in interest rates in those countries. Changes in interest rates in Israel and the USA could have an adverse effect on the yields of the convertible securities portfolios of insurance companies held by subsidiaries, which provide collateral for insurance liabilities.

The table below describes the impact on pre-tax profit and on equity (if there is no effect on pre- tax profit), following possible changes in market interest rates in respect of financial instruments bearing variable interest.

Effect on earnings (loss) Effect on equity 2009 2009 Increase Decrease Increase Decrease of 0.5% of 0.5% of 0.5% of 0.5% Risk factor NIS millions

Nominal NIS interest (2) 2 - - Real NIS interest (1) 1 - - USD interest (35) 33 - - EUR interest (4) 4 (21) 21 GBP interest - - - - CHF interest - - - -

Most of the loans are at variable interest. The Group companies carry out interest rate swap transactions to reduce the exposure. The open transactions at the date of the balance sheet are as follows:

Delek Benelux entered into a number of interest rate swap contracts At December 31, 2009, the transactions amounted to € 142 million, for which Delek Benelux pays effective interest of 2.31 (in 2008, 4.32%- 4.05%). These swap transactions are partially accounted for as accounting hedging transactions. The fair value of the transactions as at December 31, 2009 reflect a liability of € 21.1 million.

The Group entered into different types of non-hedging interest swap transactions in a scope of NIS 173 million, the fair value of which on December 31, 2009, reflects a liability of NIS 1.2 million, and is recognized under current liabilities.

C-110 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 29 – FINANCIAL INSTRUMENTS (CONTD.)

A. Financial risk factors (contd.)

6. Price risk

The Group has investments in marketable financial instruments on the TASE, shares and debentures, classified as available-for-sale and financial assets measured at fair value through profit or loss, and other financial instruments, for which the Group is exposed to changes in fair value based on the market price on the TASE.

For the impact of the price risk on insurance subsidiaries in Israel, see section E below.

The table below presents the impact of possible changes on market prices of securities on pre- tax profit and on capital (with the exception of insurance subsidiaries).

Effect on earnings (loss) Effect on capital 2009 2008 2009 2008 Price Price Price Price Price Price Price increas decreas increas decreas increas decreas increas Price e of e of e of e of e of e of e of decreas 20% 20% 20% 20% 20% 20% 20% e of 20% Risk factor NIS millions

Price of corporate debentures 24 (24) 22 (22) - - - - Share price 63 (63) 10 (10) 122 (122) 30 (30)

7. Transactions of oil and gas prices

(1) DES has financial assets in respect of hedge transactions on the price of oil and gas, which include put and call options. At the reporting date, the balance of these assets is NIS 9 million (in 2008, NIS 59 million).

(2) DES has financial liabilities in respect of hedge transactions on the price of oil and gas. At the reporting date, the balance of these liabilities is NIS 22 million (in 2008, NIS 27 million).

(3 DES has open agreements for the sale of 800 tons of diesel fuel in consideration of $5 million.

The table below presents the impact of possible changes in the prices of oil, gas and fuel on pre-tax profit:

Profit (loss) from the change 2009 2008 Price Price Price Price increase decrease increase of decrease of 20% of 20% 20% of 20% Risk factor NIS millions

Oil price (10) 15 (22) 25 Gas price 1 1 (2) 2 Fuel price 23 (23) 15 (15)

C-111 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 29 – FINANCIAL INSTRUMENTS (CONTD.)

B. Fair value

The table below describes the balance in the financial statements and the fair value of groups of financial instruments, presented in the financial statements, not on the basis of fair value.

Balance Fair value December 31 December 31 2009 2008 2009 2008 NIS millions

Financial liabilities

Long-term fixed interest loans (8,877) (17,341) (8,556) (18,472) Convertible debentures - (205) - (86) Debentures (3,411) (9,807) (3,160) (4,935)

Total (12,288) (27,353) (11,716) (23,493)

The carrying amount of financial instruments such as cash and cash equivalents, short-term investments, trade receivables, other receivables, financial derivatives, loans to affiliates, long-term loans extended, borrowings from banks and others, liabilities to trade payables and other payables is equal to or approximates their fair value.

C. Classification of financial instruments according to fair value level

The financial instruments presented in the statements at fair value are classified into groups with similar characteristics. The fair value level set out below is determined according to the inputs used to determine fair value:

Level 1: quoted prices (unadjusted) in active markets for identical assets and liabilities Level 2: inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly Level 3: inputs that are not based on observable market data (unobservable inputs)

Financial assets measured at fair value

Level 1 Level 2 Level 3 NIS millions December 31, 2009

Financial assets at fair value through profit or loss Shares 194 - - Debentures 410 - - Government loans - 24 - Non-hedging financial derivatives Available-for-sale financial assets: Shares 62 93 536

C-112 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 29 – FINANCIAL INSTRUMENTS (CONTD.)

C. Classification of financial instruments according to fair value level (contd.)

Financial liabilities measured at fair value

Level 1 Level 2 Level 3 NIS millions December 31, 2009

Financial liabilities at fair value through profit or loss Non-hedging financial derivatives 2 179 23

Financial liabilities at fair value through profit or loss Hedging financial derivatives - 25 -

Level 3 financial assets

Available-for- sale financial assets NIS millions

Balance at January 1, 2009 582

Total profit recognized in other comprehensive income 8 Transfers to level 3 (for a held-for-sale asset) (29) Adjustments for translation of financial statements of (25)

Balance at December 31, 2009 536

C-113 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 29 – FINANCIAL INSTRUMENTS (CONTD.)

D. Linkage of monetary balances

December 31, 2009 NIS Foreign currency Monetary items in autonomic units Performa CPI- Other Fair nce Canadia Foreign Non- Unlinked linked USD GBP Yen Euro currency value based USD n dollar GBP Euro currency monetary Total NIS millions

Cash and cash equivalents 2,201 - 314 - - 17 24 - - 1,000 - - 441 - - 3,997 Performance-based cash and cash equivalents in insurance companies ------1,103 ------1,103 Short-term investments in the financial sector ------16,156 ------16,156 Short-term investments in insurance companies ------1,765 332 - - - - - 2,097 Other short-term investments 83 - 55 - - - 3 521 ------662 Financial derivatives ------20 ------20 Trade receivables 2,438 3 199 - - 8 1 - - 290 - - 721 - - 3,660 Insurance premium receivable 149 260 39 - - - - 57 489 - - - - 994 Other receivables 276 227 165 - - - 18 - 30 32 - - 63 - 61 872 Taxes receivable - 95 ------179 - - 10 - - 284 Reinsurance assets 1 333 17 - - - - - 17 1,654 - - - - - 2,022 Inventory ------1,683 1,683 Deferred acquisition expenses in insurance companies ------8 - - - - - 356 364 Assets held for sale ------206 ------206 Financial investments of insurance companies ------11,104 16,050 1,163 - - - - - 28,317 Long-term loans, deposits and receivables 477 99 312 - - - 12 - - 41 - - 13 - 18 972 Investments in other financial assets - - - - 1,360 - - - - - 58 1,418 Investment in investees and partnerships - 496 652 - - - 27 - - - - - 138 - 893 2,206 Investment property ------451 451 Investments in oil and gas exploration and production ------1,331 1,331 Reinsurance assets 3 875 45 - - - - - 44 604 - - - - - 1,571 Property, plant and equipment, net ------6,798 6,798 Deferred acquisition expenses in insurance companies ------680 680 Advance expenses (primarily for operating lease) ------408 408 Structured bonds ------873 ------873 Goodwill ------227 - - - - 3,015 3,242 Other intangible assets, net ------37 - - - - 1,713 1,750 Deferred taxes ------219 219 Total assets 5,628 2,388 1,798 - - 25 85 30,240 19,074 6,048 - - 1,386 - 17,684 84,356

C-114 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 29 – FINANCIAL INSTRUMENTS (CONTD.)

D. Linkage of monetary balances (contd.)

December 31, 2009 NIS Foreign currency Monetary items in autonomic units Performa Non- CPI- Other Fair nce Canadia Other monetary Unlinked linked USD Yen Euro currency value based USD n $ GBP Euro currency items Total NIS millions Liabilities Borrowings from banks and others 1,007 1,112 740 52 190 127 - - 271 - - 242 - - 3,741 Trade payables 145 560 946 3 46 - - 727 - - 452 - - 2,879 Other payables 1,273 344 322 - 9 3 - 106 516 - - 964 - 3 3,540 Exchange traded funds and deposit ------15,639 ------15,639 Taxes payable 73 6 ------7 - - 86 Financial derivatives ------82 ------82 Dividend due 183 ------183 insurance reserves and outstanding claims 25 1,984 19 - - - - 752 2,650 - - - - - 5,430 Loans from banks and others 305 449 995 - 112 67 - - 1,766 - - 1,467 - - 5,161 Other debentures 2,936 7,218 194 - - - - - 354 - - - - - 10,702 Structured bonds ------933 ------933 Option warrants and the convertible component of debentures ------9 ------9 Financial derivatives ------114 ------114 Liabilities for employee benefits, net ------27 - 181 208 Insurance reserves and outstanding claims 144 11,350 107 - - - - 16,787 964 - - - - - 29,352 Provisions and other liabilities 26 250 43 33 33 - 194 - 90 - - 51 - 119 839 Deferred taxes ------447 - - 74 - 349 870

Total liabilities 6,117 22,713 2,980 1,031 347 243 399 34,217 7,785 - - 3,284 - 652 79,768

Equity balance, net (489) (20,325) (1,182) (1,031) (322) (158) 29,841 (15,143) (1,737) - - (1,898) - 17,032 4,588

C-115 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 29 – FINANCIAL INSTRUMENTS (CONTD.)

E. Sensitivity analyses and main assumptions

The changes selected in the relevant risk variables were based on management assessments of the reasonable changes that are likely in these risk variables.

The Company performed sensitivity analyses for the main market risk factors that could affect the operating outcome or reported financial situation. The sensitivity analyses present the profit or loss and/or change in equity (before tax) for each financial instrument in respect of the relevant risk variable for each reporting date. The risk factors are tested on the basis of the significance of the exposure of the operating outcomes or the financial situation for each risk factor in relation to the functional currency and assuming that all the other variables are fixed.

The risk is not exposed to interest risk in loans at fixed interest. For loans at fixed interest, the sensitivity test for interest risk will only be performed on the variable component in the interest. Sensitivity tests for marketable investments with a quoted market price (TASE price) were based on possible changes in these market prices. Tests of sensitivity to changes in the CPI and changes in Japanese yen interest are not material. For an investment in an available-for-sale financial asset, the sensitivity test is based on the anticipated price when raising future capital.

Sensitivity tests for options were generally based on the Black and Scholes model.

F. Market risks in insurance companies

Revenue from investments arising from performance-based portfolios and nostro portfolios has a material impact on the Company’s profits. The extent of the impact on profits depends on the characteristics of the collateral liabilities (nostro and profit sharing) and the conditions of the management fees in products for which the relevant reserve is held.

1. Performance-based contracts

In profit-sharing policies issues from 2004 onwards, all yields from investments are charged to the policyholders and the insurer is eligible for fixed management fees of 1-2%, based on the track. For these products, the impact of the yields on the profits of the insurance company is reduced to exposure due to the total scope of the reserve from which the insurer’s management fees are derived.

In profit-sharing policies issued up until December 31, 2003, the yield from the investment is charged to the policyholders and the insurer is eligible for variable management fees of 15% of the real profit achieved after deducting the fixed management fees. In these products, as well as the exposure derived from the amount of the accumulation, there is an impact of the Company’s profits as a result of the rate of the variable management fees derived in accordance with the real yields charged to the policyholders.

In pension and provident funds, all yields from investments (less fixed management fees) are charged to the members, therefore the impact of the results of the investment on the profits of the company managing the pension or provident fun is reduced to the impact derived from the total scope of the accrued amount in the pension or provident fund from which the management fees for the management company is derived.

In view of the aforesaid, the sensitivity tests and maturity dates of the liabilities set forth below do not include performance-based contracts.

Below a sensitivity test for performance-based contracts and the impact change in yield affects profit (loss).

C-116 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 29 – FINANCIAL INSTRUMENTS (CONTD.)

F. Market risks in insurance companies (contd.)

1. Performance-based contracts (contd.)

Every change of 1% in the real yield on the investments in the context of performance-based yields for policies issued up to 2004 with liabilities of NIS17.5 billion as of December 31, 2009, affects the management fees in the amount of NIS 26 million. The impact of the change on policies issued commencing from 2004 onwards is not material. When the yield of these contracts is negative, the Company does not collect management fees and is not able to collect them until a positive yield is achieved that will cover the accrued negative yield. On December 31, 2008, there was a negative yield of 3.43%. According to the instructions, variable management fees cannot be collected until the entire accrued negative yield is covered, therefore the change of 1% in the real yield on the investment in the context of performance- based contracts will not have an immediate impact on the profit until the negative yield is covered.

2. Sensitivity to market risks

The tables below describe the sensitivity tests presenting the change in profit (loss) and equity for the financial assets and liabilities and liabilities for insurance and investment contracts for the relevant risk variable as of each reporting date, assuming that all the other variables are fixed. These sensitivity tests include the impact of performance-dependent contracts as described above. The changes in the variables are in relation to the carrying amount of the assets and liabilities. In addition, it was assumed that the changes do not reflect impairment of assets stated at reduced cost or available-for-sale assets, therefore, in the sensitivity tests, impairment losses were not included for these assets.

The sensitivity tests reflect direct impacts only, without secondary impacts.

It is noted that the sensitivities are not linear, such that larger or smaller changes in relation to the changes described below are not necessarily simple extrapolation of the impact of the changes.

December 31, 2009 (The Phoenix)

Change in interest Investment in equity Change in dollar rate instruments Change in CPI exchange rate 1%+ 1%- 10%+ 10%- 1%+ 1%- 10%+ 10%- NIS millions

Profit (loss) (1) 1 4 (4) (29) 29 (36) 36 Equity (comprehensive income) (96) 96 28 (28) (29) 29 (12) 12

December 31, 2008

Change in interest Investment in equity Change in dollar rate instruments Change in CPI exchange rate 1%+ 1%- 10%+ 10%- 1%+ 1%- 10%+ 10%- NIS millions

Profit (loss) - - 12 (12) (22) 22 (46) 46 Equity (comprehensive income) (69) 69 39 (39) (22) 22 (19) 19

C-117 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 29 – FINANCIAL INSTRUMENTS (CONTD.)

F. Market risks in insurance companies (contd.)

3. Liquidity risk

Liquidity risk is the risk that the Company will be required to dispose of its assets at an inferior price in order to meet its liabilities.

a) The Phoenix is exposed to risks arising from uncertainty regarding the date it will be required to pay claims and benefits to policyholders in respect of the scope of finances that will be available at that date. However, a significant part of its insurance liabilities in the life assurance sector are not exposed to liquidity risk due to the nature of the insurance contracts as described below.

b) It is noted, however, that a possible unexpected requirement to raise funds in a short time could require significant disposal of assets within a short time, at prices that do not necessarily reflect their market value.

c) Performance-based contracts in life assurance: In accordance with the conditions of the contracts, the policyholders are entitled to receive the value of the investments, and no more. Therefore, if the value of the investments falls for any reason, there will be a corresponding decrease in the level of the Company’s liabilities.

d) Non-performance based contracts in life assurance: 98% of the life assurance portfolio is for non-performance based contracts, however they guarantee an agreed yield. These contracts are mainly hedged by designated debentures (Hetz) issued by the Bank of Israel. The Company may exercise these debentures when these policies are called for redemption.

e) The Phoenix’s liquidity risk is mainly due to the assets balance that are not designated debentures and are not against performance-based contracts. These assets represent 59% alone (NIS 32 billion) out of all the Company’s assets. Out of the balance of the assets, NIS 5 billion are marketable assets that can be sold immediately. In accordance with the investment directives, the Company is required to hold liquid assets (in other words, government debentures or cash and cash equivalents) amounting to at least 15% of the required capital.

4. Management of assets and liabilities

The tables below summarize the estimated maturity dates of the Company’s non-discounted insurance and financial liabilities. As the amounts are not discounted, there is no correlation between them and the balance of the insurance and financial liabilities in the balance sheet.

The estimated maturity dates of the life assurance and health insurance liabilities are included in the tables as follows: Savings: contractual maturity dates, in other words, retirement age, without assumed cancellations, and assuming the savings will continue as capital and not annuity. Annuity policies, loss of working capacity, and health insurance – based on an actuarial estimate. Other – reported under “Without a defined maturity date”. The maturity dates of financial liabilities and liabilities for investment contracts were included on the basis of the contractual maturity dates. In contracts in which the other party has the right to choose the date for payment of the amount, the liability is included on the basis of the earliest date that the Company can be asked to pay the liability.

C-118 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 29 – FINANCIAL INSTRUMENTS (CONTD.)

F. Market risks in insurance companies (contd.)

4. Management of assets and liabilities (contd.)

Liabilities for life assurance *)and health insurance **) (The Phoenix)

Without More a defined Up to 1 1-5 5-10 10-15 than 15 maturity year years years years years date Total NIS Millions

December 31, 2009 1,393 2,516 3,325 1,391 1,933 529 11,087

December 31, 2008 1,169 2,410 3,246 1,367 2,175 540 10,907

*) Not including performance-based contracts

Liabilities for general insurance contracts **) (The Phoenix)

Without a More defined than 5 maturity 1-3 years 3-5 years years date Total NIS millions

December 31, 2009 2,516 788 912 186 4,402

December 31, 2008 2,555 780 869 140 4,344

Financial liabilities and liabilities for investment contracts

More Up to 1 1-5 5-10 10-15 than 15 year years years years years Total NIS millions At December 31, 2009

Financial liabilities 863 998 1,432 18 16 3,327

Liabilities for investment contracts 26 8 7 - 1 42

Liability for performance-based investment contracts 386 - - - - 386

Liability for contingent consideration and provision for payment for the option to acquire an investee 132 341 89 - - 562

At December 31, 2008

Financial liabilities 450 906 201 28 17 1,602

Liabilities for investment contracts 8 33 6 - - 47

Liability for performance-based investment contracts 355 - - - - 355

*) Liabilities up to one year include NIS 386 million (December 31, 2008, NIS 355 million) repayable on demand. These liabilities were classified as repayable up to one year, even though the actual repayment dates could be later.

C-119 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 29 – FINANCIAL INSTRUMENTS (CONTD.)

F. Market risks in insurance companies (contd.)

5. Credit risks - Debt assets by rating

Debt assets of insurance companies in Israel

Local rating *) December 31, 2009 AA or BBB Lower higher to A than BBB Unrated Total NIS millions

Marketable debt assets Government debentures 176 2 - 3,205 3,383 Corporate debentures 894 382 6 15 1,297

Total marketable debt assets in Israel 1,070 384 6 3,220 4,680

Non-marketable debt assets Government debentures - - - 4,888 4,888 Corporate debentures 404 533 59 15 1,011 Deposits in banks and financial institutions 1,000 24 - - 1,024 Other debt assets according to securities: Mortgages - - - 98 98 Loans on policies 114 - - - 114 Other securities 135 290 - 102 527 Unsecured - 150 - 5 155

Total unmarketable assets in Israel 1,653 997 59 5,108 7,817

Total debt assets in Israel 2,723 1,381 65 8,328 12,497

Of which – debt assets with internal rating 254 558 46 - 858

*) Each rating includes all the ranges, for example: A includes A- to A+.

International rating *) December 31, 2009 Lower than A or higher BBB BBB Unrated Total NIS millions Debt assets abroad

Corporate debentures - - - 2 2

Total marketable debt assets abroad - - - 2 2

Non-marketable debt assets - - - - - Government debentures - - - - - Mortgages - 16 - - 16 Loans in other securities - 24 16 - 40

Total unmarketable assets abroad - 40 16 - 56

Total debt assets abroad - 40 16 2 58

Of which – debt assets rated internally - 40 16 - 56

*) Each rating includes all the ranges, for example: A includes A- to A+.

C-120 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 29 – FINANCIAL INSTRUMENTS (CONTD.)

F. Market risks in insurance companies (contd.)

5. Credit risks - Debt assets by rating (contd.)

Debt assets of insurance companies in Israel (contd.)

Local rating *) December 31, 2008 AA or BBB Lower than higher to A BBB Unrated Total NIS millions

Marketable debt assets Government debentures - - - 1,678 1,678 Corporate debentures 525 244 1 43 813

Total marketable debt assets In Israel 525 244 1 1,721 2,491

Non-marketable debt assets Government debentures - - - 4,676 4,676 Corporate debentures 640 410 35 - 1,085 Deposits in banks and financial institutions 1,073 25 - - 1,098 Other debt assets according to securities: Mortgages - - - 125 125 Loans on policies 112 - - - 112 Other securities 114 417 117 50 698 Unsecured - - - 56 56

Total unmarketable assets in Israel 1,939 852 152 4,907 7,850

Total debt assets in Israel 2,464 1,096 153 6,628 10,341

Of which – debt assets with internal rating 218 249 78 - 545

*) Each rating includes all the ranges, for example: A includes A- to A+.

International rating *) December 31, 2008 Lower than A or higher BBB BBB Unrated Total NIS millions Debt assets abroad

Corporate debentures 14 59 14 1 88

Total marketable debt assets abroad 14 59 14 1 88

Non-marketable debt assets Government debentures - - - - - Mortgages - 11 - - 11 Loans in other securities - 29 23 - 52

Total unmarketable assets abroad - 40 23 - 63

Total debt assets abroad 14 99 37 1 151

Of which – debt assets rated internally - 24 23 - 47

*) Each rating includes all the ranges, for example: A includes A- to A+.

C-121 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 29 – FINANCIAL INSTRUMENTS (CONTD.)

F. Market risks in insurance companies (contd.)

5. Credit risks - Debt assets by rating (contd.)

Credit risks for other assets (in Israel)

Local rating *) December 31, 2009 BBB Lower than A or higher to A BBB Unrated Total NIS millions

Loans to affiliates **) - - - 194 194

Other receivables, other than balances from reinsurers - - - 404 404

Deferred tax assets - - - 20 20

Other finance investments 47 - - 41 88

Cash and cash equivalents 671 - - - 671

*) Each rating includes all the ranges, for example: A includes A- to A+.

Local rating *) December 31, 2008 BBB Lower than A or higher to A BBB Unrated Total NIS millions

Loans to affiliates - - - 150 150

Other receivables, other than balances from reinsurers - - - 309 309

Deferred tax assets - - - 90 90

Other finance investments - - - 110 110

Cash and cash equivalents 451 - - - 451

*) Each rating includes all the ranges, for example: A includes A- to A+.

Local rating *) December 31, 2009 BBB Lower A or higher to A than BBB Unrated Total NIS millions

Unused credit facilities - - - 20 20

Local rating *) December 31, 2008 BBB Lower A or higher to A than BBB Unrated Total NIS millions

Unused credit facilities - - - 20 20

*) Each rating includes all the ranges, for example: A includes A- to A+.

C-122 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 29 – FINANCIAL INSTRUMENTS (CONTD.)

F. Market risks in insurance companies (contd.)

5. Credit risks - Debt assets by rating (contd.)

Credit risks for other assets (in Israel)

International rating *) December 31, 2009 Lower A or higher BBB than BBB Unrated Total NIS millions

Other finance investments 68 4 3 125 200

International rating *) December 31, 2008 Lower A or higher BBB than BBB Unrated Total NIS millions

Other finance investments 51 84 3 246 384

*) Each rating includes all the ranges, for example: A includes A- to A+.

Debt assets of insurance companies abroad

International rating December 31, 2009 Lower A or higher BBB+ than BBB Unrated Total NIS millions

Marketable debt assets Government debentures 109 - - - 109 Corporate debentures 793 64 162 11 1,030

Total marketable debt assets abroad 902 64 162 11 1,139

Non-marketable debt assets Government debentures - - - - -

Total debt assets abroad 902 64 162 11 1,139

C-123 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 29 – FINANCIAL INSTRUMENTS (CONTD.)

F. Market risks in insurance companies (contd.)

5. Credit risks - Debt assets by rating (contd.)

Debt assets of insurance companies abroad (contd.)

International rating December 31, 2008 Lower A or higher BBB+ than BBB Unrated Total NIS millions

Marketable debt assets Government debentures 140 - - - 140 Corporate debentures 1,194 88 51 276 1,609

Total marketable debt assets abroad 1,334 88 51 276 1,749

Non-marketable debt assets Government debentures - - - 4 4

Total debt assets abroad 1,334 88 51 280 1,753

6. Exposure to credit risks of reinsurers

The insurance companies insure some of their business affairs with reinsurance, mainly through reinsurers abroad. However, reinsurance does not exempt the direct insurers of their liability towards the policyholders according to the insurance policies.

The insurance companies are exposed to risks due to uncertainty regarding the ability of the reinsurers to pay their share of the liabilities for insurance contracts (reinsurance assets) and their liabilities for claims paid. This exposure is managed by ongoing monitoring of the situation of the reinsurer in the global market and compliance with its financial obligations.

The Company is exposed to credit risk to a single reinsurer, due to the structure of the reinsurance market and the limited number of reinsurers with an adequate rating.

C-124 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 29 – FINANCIAL INSTRUMENTS (CONTD.)

F. Market risks in insurance companies (contd.)

6. Exposure to credit risks of reinsurers (contd.)

At December 31, 2009

In the books of insurance companies in Israel

Reinsurance assets Past due debts Total premiums Debit Total for (credit) general Property reinsurers balance, insurance Health insurance Liability Reinsurer Total 6-12 More than in 2009 net (b) *) insurance *) insurance deposits exposure months one year Name of reinsurer NIS millions

AA or higher Kolnische Ruckvresicherungs- Gesellschsaft AG 91 (3) 26 142 - - 23 142 - -

Munich Reinsurance Co AG 138 25 16 105 24 156 66 260 1 -

Others 36 5 3 - 35 66 9 100 1 -

Total 265 27 45 247 59 222 98 502 2 -

A Swiss Reinsurance Co 101 4 92 28 48 107 75 204 - -

Others 295 (5) - - 198 198 61 330 - -

Total 396 (1) 92 28 246 305 136 534 - -

Total BBB - - - - - 6 - 7 - -

Lower than BBB or unrated 10 (2) 8 - 14 63 6 77 1 2

Total 671 24 145 275 319 596 240 1,120 3 2

C-125 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 29 – FINANCIAL INSTRUMENTS (CONTD.)

F. Market risks in insurance companies (contd.)

6. Exposure to credit risks of reinsurers (contd.)

At December 31, 2009

In the books of insurance companies abroad

Past due Total debts included reinsurance Reserves Outstanding claims Reinsurer Total in open premiums exposure balances 2009 Net balances for risks Assets Liabilities deposits (a) 6-12 months NIS millions

A- (minus) and higher

Hartford Fire Insurance Co. 664 - 336 23 276 - 635 - Others 1,299 (87) 555 117627 - 1,212 -

1,963 (87) 891 140903 - 1,847 -

B and above 109 (19) 26 - 102 - 109 -

Unrated 136 (34) 79 8 57 - 110 -

Total 2,208 (140) 996 148 1,062 - 2,066 -

a) The total exposure for reinsurers is the share of reinsurers in insurance reserves and outstanding claims, net of deposits and net of the amount of the credit notes received from the reinsurer to secure their liabilities, plus (less) the net current debit (credit) balance.

b) The rating was determined by the rating company AM Best.

c) Republic received credit notes in the amount of NIS 580 million from reinsurers to secure their liabilities

C-126 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 29 – FINANCIAL INSTRUMENTS (CONTD.)

F. Market risks in insurance companies (contd.)

6. Exposure to credit risks of reinsurers (contd.)

As of December 31, 2008

In the books of insurance companies in Israel

Reinsurance assets Debts in arrears Debit Reinsurer (credit) General Property More premium balance, insurance Health insurance Liability Reinsurer Total 6-12 than one s in 2008 net (b) *) insurance *) insurance deposits exposure months year Name of reinsurer NIS millions

AA or higher Kolnische Ruckvresicherungs- Gesellschsaft AG 85 (5) 20 129 - 1 22 123 - -

Munich Reinsurance Co AG 103 5 14 62 31 206 26 292 - -

Others 96 4 2 - 107 108 32 189 - -

Total 284 4 36 191 138 315 80 604 - -

A Swiss Reinsurance Co 93 (8) 77 31 31 107 70 168 - -

Others 198 (12) 6 - 156 107 57 200 1 -

Total 291 (20) 83 31 187 214 127 368 1 1

Total BBB - 1 - - - 11 - 12 - -

Lower than BBB or unrated 9 (3) 2 - 13 51 - 63 1 -

Total 584 (18) 121 222 338 591 207 1,047 2 1

C-127 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 29 – FINANCIAL INSTRUMENTS (CONTD.)

F. Market risks in insurance companies (contd.)

6. Exposure to credit risks of reinsurers (contd.)

As of December 31, 2008

In the books of insurance companies abroad

Past due debts Total included in premiums for Reserves Outstanding claims Total open reinsurers for Reinsurers’ exposure balances 2008 Net balance risks Assets Liabilities deposits (a) 6-12 months NIS millions

A- (minus) and higher

Hartford Fire Insurance Co. 563 (4) 287 16 198 - 497 - American Hallmark Insurance Co. 296 (14) 146 11 197 - 340 - Others 767 (36) 233238 356 - 791-

1,626 (54) 666265 751 - 1,628-

A to B - - - - 3 - 3 -

Unrated 61 (16) 26 - 34 - 44 -

Total 1,687 (70) 692265 788 - 1,675-

b) The rating was determined by the rating company AM Best.

c) The share of the reinsurers in the amount of Company’s risk insurance for earthquakes and other disasters amounts to NIS 9 million. The most significant share of the reinsurers in this exposure is 100%.

d) The Company received credit notes in the amount of NIS 369 million from reinsurers to secure their liabilities

C-128 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 30 – EMPLOYEE BENEFIT ASSETS AND LIABILITIES

Post-employment benefits

Labor laws and the Severance Pay Law in Israel requires the Group companies to pay compensation to employees if they are dismissed or when they retire or to make routine deposits in defined deposit plans under section 14 of the Severance Pay Law, as described below. The liability of the Group companies for this is recognized as a post-employment benefit. The liability of the Group companies for employee benefits is based on the valid labor agreement and the employee's salary, which generate the right for compensation.

Post-employment benefits are usually financed by deposits classified as a defined benefit plan or as a specific deposit plan as described below.

Defined deposit plan

The provisions of section 14 of the Severance Pay Law, 5723-1963 (“the Severance Law) apply to part of the compensation payments, according to which the Group's routine deposits in the pension fund and/or insurance policies exempt it from any other liability towards the employees.

Defined benefit plan

The Group has a defined benefit plan for severance pay under the Severance Pay Law. By law, employees are entitled to compensation if they are dismissed or on demand. The liability for severance is based on the actuarial method.

NOTE 31 – INSURANCE RESERVES AND OUTSTANDING CLAIMS

A. Liabilities for insurance contracts and investment contracts

Non-performance-based insurance contracts and investment contracts

December 31 2009 2008 2009 2008 2009 2008 Gross Reinsurance Residual NIS millions Life assurance and long-term saving Insurance contracts 8,256 7,700 104 89 8,152 7,611 Investment contracts 37 43 - - 37 43

Net of amounts deposited in the Company as part of a defined benefit plan for Group employees (42) (42) - - (42) (42)

Total life assurance and long- term saving 8,251 7,701 104 89 8,147 7,612

Insurance contracts included in the health insurance sector 989 867 265 216 724 651 Insurance contracts included in the general insurance sector 8,003 7,492 3,114 2,677 4,889 4,815

Total liabilities for non- performance dependant insurance contracts and investment contracts 17,243 16,060 3,483 2,982 13,760 13,078

C-129 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 31 – INSURANCE RESERVES AND OUTSTANDING CLAIMS (CONTD.)

A. Liabilities for insurance contracts and investment contracts

Performance-based insurance contracts and investment contracts

December 31 2009 2008 2009 2008 2009 2008 Gross Reinsurance Residual NIS millions Life assurance and long-term saving Insurance contracts 17,054 12,216 41 31 17,013 12,185 Investment contracts 386 355 - - 386 355

Net of amounts deposited in the Company as part of a defined benefit plan for Group employees (46) (44) - - (46) (44)

Total life assurance and long- term saving 17,394 12,527 41 31 17,353 12,496

Insurance contracts included in the general insurance sector 146 99 10 6 136 93

Total liabilities for non- performance dependant insurance contracts and investment contracts 17,540 12,626 51 37 17,489 12,589

C-130 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 31 – INSURANCE RESERVES AND OUTSTANDING CLAIMS (CONTD.)

B. Liabilities for insurance contracts included in the general insurance sector, by category:

December 31 2009 2008 2009 2008 2009 2008 Gross Reinsurance Residual NIS millions In Israel

Compulsory motor insurance 3,495 3,341 596 617 2,899 2,723 Property and other branches 894 872 320 313 575 559

Total liabilities for insurance contracts in the general insurance sector 4,389 4,213 916 930 3,474 3,282

Deferred acquisition costs: Compulsory motor insurance 40 28 7 2 33 26 Property and other branches 106 107 24 25 82 82

Total 146 135 31 27 115 108

Liabilities for general insurance contracts net of deferred acquisition costs:

Compulsory motor insurance and liabilities (C1) 3,455 3,312 589 614 2,866 2,698 Property and other branches 789 765 295 288 493 477

Total liabilities in insurance contracts General net of deferred acquisition costs 4,244 4,077 884 902 3,359 3,175

December 31 2009 2008 2009 2008 2009 2008 Gross Reinsurance Residual NIS millions Abroad

Total liabilities for insurance contracts in the general insurance sector 1,685 1,536 992 692 693 844

Provisions for contingent claims

Motor 880 783 676 559 204 224 Property 216 346 106 232 110 114 Liability 833 614 425 264 408 350

Total provisions for contingent claims 1,929 1,743 1,207 1,055 722 688

Total 3,614 3,279 2,199 1,747 1,415 1,532

C-131 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 31 – INSURANCE RESERVES AND OUTSTANDING CLAIMS (CONTD.)

C. Change in liabilities for insurance contracts included in the general insurance sector, net of deferred acquisition costs:

In Israel

1. Compulsory motor insurance

Year ended December 31 2009 2008 2009 2008 2009 2008 Gross Reinsurance Residual NIS millions

Balance at the beginning of the year 3,312 3,169 614 659 2,698 2,510

Cumulative cost of claims for the current underwriting year 510 446 41 33 469 413 Change in balances at the beginning of the year as a result of linkage to the CPI and investment profit before discounting liabilities 207 222 35 41 172 181 Change in estimated cost of claims for prior underwriting years (120) (78) (62) (43) (58) (35)

Total change in cumulative cost of claims 597 590 14 31 583 559

Payments to settle claims during the year For the current underwriting year (11) (12) (1) (1) (11) (11)

For prior underwriting years (489) (456) (67) (71) (422) (385)

Total payments for the year (500) (468) (68) (72) (433) (396)

Other 46 21 29 (4) 18 25

Balance at the end of the year 3,455 3,312 589 614 2,866 2,698

C-132 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 31 – INSURANCE RESERVES AND OUTSTANDING CLAIMS (CONTD.)

C. Change in liabilities for insurance contracts included in the general insurance sector, net of deferred acquisition costs: (contd.)

In Israel

2. Property and other branches

Year ended December 31 2009 2008 2009 2008 2009 2008 Gross Reinsurance Residual NIS millions

Balance at the beginning of the year 765 881 288 387 477 494

Aggregate cost of claims for the reporting year 695 685 182 168 513 517 Change in the aggregate cost of claims for events prior to the reporting year (16) (38) 1 (30) (18) (8)

Payments to settle claims during the year (474) (468) (93) (88) (381) (380)

For events prior to the reporting year (205) (304) (82) (159) (123) (145)

Total payments (679) (772) (175) (247) (504) (525)

Changes in provisions for net unearned premiums from deferred acquisition expenses 23 8 (1) 9 24 (1)

Balance as of end of year 788 765 295 288 493 477

C-133 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 31 – INSURANCE RESERVES AND OUTSTANDING CLAIMS (CONTD.)

C. Change in liabilities for insurance contracts included in the general insurance sector, net of deferred acquisition costs: (contd.)

Abroad

2. Property and other branches (contd.)

Year ended December 31 2009 2008 2009 2008 2009 2008 Gross Reinsurance Residual NIS millions

Total liabilities for insurance contracts in the general insurance sector at year end 1,685 1,536 992 692 693 844

Change in provisions for claims

Balance at the beginning of the year 1,743 1,429 1,055 792 688 637

Cumulative cost of claims for underwriting year operating activities 2,330 2,562 1,302 1,518 1,028 1,044 Change in estimated cost of claims for prior underwriting years 107 (4) 80 2 27 (6)

Total change in cumulative cost of claims 2,437 2,558 1,382 1,520 1,055 1,038

Payments to settle claims during the years For the current underwriting year (1,200) (1,571) (572) (901) (628) (670) For prior underwriting years (1,027) (646) (642) (366) (385) (280)

Total payments for the period (2,227) (2,217) (1,214) (1,267) (1,013) (950)

Effect of changes in the exchange rate for foreign operations (24) (27) (16) 10 (8) (37)

Balance at the end of the year 1,929 1,743 1,207 1,055 722 688

Balance at the end of the year 3,614 3,279 2,199 1,747 1,415 1,532

3. Opening and closing balance: Outstanding claims, provision for short premium, unearned premium reserve, net of deferred acquisition costs.

4. Cost of cumulative claims (ultimate) is: The balance of the outstanding claims (non-cumulative) provision to short premium, Unearned premium reserve net of deferred acquisition costs with the addition of the total claims payments including direct and indirect expenses to settle claims.

5. The payments include indirect expenses to settle claims (administrative and general recorded in the claims) in relation to the underwriting years.

C-134 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 31 – INSURANCE RESERVES AND OUTSTANDING CLAIMS (CONTD.)

D. Insurance reserves and outstanding claims are presented in the balance sheet as follows:

December 31 2009 2008 NIS millions

Current liabilities 5,430 4,742 Long term liabilities 29,352 23,944

34,782 28,686

E. Insurance risks

Insurance risk, including:

Underwriting risk: the risk of using incorrect prices due to deficiencies in the underwriting process and due to the gap between the risk when pricing and establishing the premium and the actual occurrence so that the collected premiums are insufficient for covering future claims and expenses. The gaps may arise from accidental changes in business results and from changes in the cost of the average claim and/or the incidence of the claims as a result of various factors.

Reserve risks: the risk of an incorrect assessment of the insurance liabilities which might cause the actuarial reserves to be inadequate for covering all the liabilities and claims. The actuarial models according to which the Company assesses its insurance liabilities are based on the fact that the pattern of the behavior of past claims represents forward looking information. The Company's exposure is comprised of the following risks:

1. Model risk – the risk of choosing an incorrect model for pricing and/or assessing the insurance liabilities 2. Parameter risk – the risk of using incorrect parameters, including the risk that the amount paid for settling the Company's insurance liabilities or that the date of settlement of the insurance liabilities is different than expected

Catastrophe risk: the exposure to an isolated event of significant effect (catastrophe) such as natural disaster, war, terror, natural damages or earthquake that will result in significant damage. The material catastrophe to which the Company is exposed in Israel is earthquake and in the United States is hurricanes and storms.

The size of the expected maximum loss in the general insurance business as a result of exposure to single large damages arising from a particularly large event with maximum possible loss (MPL) probability of 2.5% is NIS 5.237 billion, gross and NIS 6 million on retention. In the United States, the exposure for a single large damage is $275 million, gross, and $15 million on retention.

Collapse of reinsurers, change in capacity and tariffs of reinsurers: Insurance companies use reinsurers to hedge against insurance risks or to share them with reinsurers. The collapse of reinsurers, change in reinsurance contracts and tariffs might impair the Company's ability to pay insurers or limit their ability to provide insurance. In the insurance sector abroad, the Republic Group issues policies on behalf of insurance companies and takes out reinsurance cover of those insurance companies. These companies bear the risk in this sector, however should they fail to meet their undertakings towards Republic Group, Republic could be liable, without it receiving indemnification.

C-135 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 31 – INSURANCE RESERVES AND OUTSTANDING CLAIMS (CONTD.)

E. Insurance risks (contd.)

1. Insurance risk in life assurance and heath insurance contracts

General

Following is a description of the various insurance products and the assumptions used to calculate their respective liabilities based on product type. According to the Commissioner's directives, the insurance liabilities are calculated by an actuary pursuant to standard actuarial methods and consistently with the previous year. The liabilities are calculated according to the relevant coverage data, such as age and gender of policyholder, term of insurance, date of commencement of insurance, type of insurance, periodic premium and amount of insurance.

Actuarial methods used to calculate the insurance liabilities

(1) Adif and investment tracks insurance programs

Adif and investment tracks insurance programs consist of an identified savings component. The basic and main reserve is in the amount of the accumulated savings plus the yield according to the policy’s terms as follows:

− Principal linked to an the investment portfolio (performance-based contracts) − Principal linked to the CPI plus a fixed guaranteed interest or credited by a guaranteed yield against adjusted assets (performance-based contracts)

In respect of insurance components that are attached to the these policies (such as occupational disability, death and long term care) the insurance liability is calculated separately as set out below.

(2) Insurance programs such as endowment (traditional)

Endowment and similar insurance programs include a savings component in the event that the policyholder is still alive at the end of the term of a program with an insurance component of death risk during the period of the program. In respect of these products, the insurance liability is calculated for each covered aspect as a discounting of the cash flows in respect of the anticipated claims, including payment at the end of the period, net of future anticipated premiums. This calculation is based on assumptions according to which the products were priced and/or on assumption based on the claims experience, including the interest rates ("tariff interest"), mortality or morbidity tables (see also section 2 below). The calculation is according to the net premium reserve method, which does not include the component that was loaded on the premium tariff for covering the commissions and expenses, in the anticipated flow of receipts and on the other hand it does not deduct the anticipated expenses and commissions. The reserve in respect of performance-based traditional products is calculated in accordance with the actual yield achieved less management fees.

(3) Liabilities for pensions according to anticipated life expectancy on the basis of the updated mortality tables constructed according to information published by the Ministry of Finance in a Supervisor circular.

C-136 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 31 – INSURANCE RESERVES AND OUTSTANDING CLAIMS (CONTD.)

E. Insurance risks (contd.)

1. Insurance risk in life assurance and heath insurance contracts (contd.)

Actuarial methods used to calculate the insurance liabilities (contd.)

(4) Liabilities in respect of annuities paid for life in respect of valid policies (paid and settled) which have not yet reached the stage of realization of annuity or the policyholder has reached retirement age and the actual payment did not yet begin, are calculated according to the probability of annuity withdrawal and in accordance with the anticipated life expectancy on the basis of the updated mortality tables, taking into consideration the anticipated profits from the policies until the policyholders reach retirement age in accordance with the regulator’s circular. If the guaranteed annuity coefficients of the policies are higher, the required increase is also higher.

5) Other life assurance programs include pure risk products (such as diseases and hospitalization, long term care, dread diseases, and disability) sold as independent policies or attached to policies with a basic program such as Adif, investment track or traditional. An actuarial liability is calculated in respect of some of these programs. The calculation is according to the gross premium reserve method which includes all the premium components in the anticipated flow of receipts and deducts the liability cost and the anticipated expenses and commissions. Negative provisions were not offset by positive provisions. Some of the plans used the net premium reserve method described above. For the other plans, the insurance liability is calculated at IBNR (claims incurred but not yet reported).

6) In respect of continuous claims in payment, in long term care and occupational disability insurance, the insurance liability is calculated according to the duration of the anticipated payment, and it is discounted according to the tariff interest rate of the product.

7) Liabilities for outstanding claims in life assurance and health insurance are calculated on the basis of the experience of the Company.

8) Liabilities for claims incurred but not yet reported (IBNR) in life assurance and health insurance are calculated on the basis of the experience of the Company.

9) Insurance liabilities in respect of collective insurance consist of a liability in respect of unearned premium, provision for participation in profits, IBNR reserve (claims incurred but not yet reported), reserve for continuity and provision for future losses, if necessary.

10) For group health and long-term care insurance, including dental and sick leave insurance, the actuarial liability is calculated on the basis of the experience of the individual collective. This liability includes reference to the insurance companies.

Major assumptions used in the calculation of insurance liabilities

(1) Discount rate

For endowment and similar insurance programs(traditional) )see section 1(E)(1)(2) above) and pure risk products with fixed premium, the interest used for discounting is as follows:

− In insurance policies that are mainly backed by designated debentures tariff interest of 3% to 5%; − for performance-based products issued in 1991 onwards, tariff linked interest of 2.5%. In accordance with the terms of the policy, changes in interest will be recognized in policyholders. − The discounting rate could change as a result of material changes in the long-term interest rate in the market.

C-137 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 31 – INSURANCE RESERVES AND OUTSTANDING CLAIMS (CONTD.)

E. Insurance risks (contd.)

1. Insurance risk in life assurance and heath insurance contracts (contd.)

Major assumptions used in the calculation of insurance liabilities (contd.)

(2) Morbidity and mortality rates

a) The mortality rates used in the calculation of insurance liabilities for death of policyholders prior to attaining the age of retirement (namely excluding the mortality of policyholders who receive retirement pensions and those receiving monthly compensation for disability or long term care) are generally identical to rates used to determine the tariff.

b) The liability for life annuity payments is calculated in accordance with updated mortality tables. Increase in the mortality rate assumption, due to increase in actual mortality rate to a level exceeding the existing assumption will result in an increase of insurance liabilities for mortality of policyholders prior to attaining the age of retirement and decrease in liability for annuities payable for life. It is noted that there has been a reverse trend of increase in the life expectancy and decrease in mortality rate in the last decades. The mortality assumption used in the calculation of the liability for annuity takes into account assumption for future increase in life expectancy.

c) The morbidity rates relate to the prevalence of claims for mortality from serious diseases, occupational disability, long term care, operations and hospitalization and disability from accident. These rates are based on the company’s experience or researches of reinsures. In the fields of long term care and disability, the period of paying annuities is determined according to the company’s experience or researches of reinsurers. As long as the morbidity rate assumption increases, the insurance liability for morbidity rate from serious diseases, disability, long term care, operations and hospitalization and accident disability.

(3) Pension rates

Life assurance policies, including savings component, were maintained for funds deposited until 2008 in two tracks: capital track and annuity track. In certain policies the policyholder may elect the track upon retirement. Since the insurance liability is different in each of these tracks, the company is obligated to determine the rate of policies in which the policyholder elects the pension track. This rate is based on the supervision guidelines while adjusting to the company’s experience. As from 2008, all plans are for pension.

(4) Cancellation rates

The cancelation rates affect the insurance liabilities in respect of part of the health insurances and the annuities paid for life during the period before beginning the payments. The cancellation of insurance contracts can be due to the cancellation of policies initiated by the company due to discontinuation of the premium payments or surrenders of policies at the policyholders' request. The assumptions regarding the cancellation rates are based on the company's experience and they are based on the type of product, the life span of the product and sales trends.

C-138 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 31 – INSURANCE RESERVES AND OUTSTANDING CLAIMS (CONTD.)

E. Insurance risks (contd.)

1. Insurance risk in life assurance and heath insurance contracts (contd.)

Major assumptions used in the calculation of insurance liabilities (contd.)

(5) Continuity rates

There are health insurances and collective long-term care insurances in which the policyholders are entitled to continue to be insured under the same conditions, even if the collective contract is not renewed. In respect of this option of the policyholders, the company has a liability that is based on assumptions regarding the continuity rates of the collective insurances and the continuity rates of the contracts with the policyholders after the collective contract expires. If there is a higher probability that the collective contract will not be renewed (a higher continuity rate) the insurance liability will also increase, since the insurance will continue under the previous conditions, without adjusting the underwriting to the change in the policyholders' state of health.

(6) Sensitivity analysis in life assurance

December 31, 2009

Cancellations (repayments, settlements and deductions) Morbidity rate Mortality rate 10%+ 10%- 10%+ 10%- 10%+ 10%- NIS millions

Profit and loss and comprehensive income (equity) 9 (8) (60) 49 44 (43)

December 31, 2008

Cancellations (repayments, settlements and deductions) Morbidity rate Mortality rate 10%+ 10%- 10%+ 10%- 10%+ 10%- NIS millions

Profit and loss and comprehensive income (equity) 9 (7) (53) 43 30 (34)

C-139 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 31 – INSURANCE RESERVES AND OUTSTANDING CLAIMS (CONTD.)

E. Insurance risks (contd.)

2. Insurance risk in general insurance contracts

Summary of the main insurance branches

The Company in Israel underwrites general insurance contracts, mainly compulsory motor insurance, liability, motor casco and property. The Company abroad underwrites mainly property, motor and liability insurance, both private and commercial.

Compulsory motor insurance in Israel covers the policyholder and driver for any liability that they might incur under the Road Accident Victims Law, 5735-1975, due to bodily injury to the driver, passengers or pedestrians injured by the vehicle. Compulsory motor insurance claims are long tail, in other words, it could be several years before the claim is settled. In foreign consolidated insurance companies, compensation for bodily injury policies in motor insurance is limited to the amount set out in the policy,

Liability insurance is designed to cover the policyholders' liability for damage that he may cause to a third party. The main types of insurance are third party liability insurance, employer liability insurance and other liability insurances such as professional liability, product liability and director and officeholder liability. The time of filing the claims and settlement is affected by a number of factors such as the type of coverage, the policy terms and legislation and legal precedents. Compulsory motor insurance claims are generally long tail, in other words, it could be several years before the claim is settled.

Policies that insure against motor vehicle damage and third party motor property damage grant the policyholder coverage for property damage. The coverage is generally limited to the value of the vehicle that was damaged. The premium for motor vehicle property insurance is an actuarial rate and partially differential (which is not uniform for all insured parties and is adjusted for risk). The premium is based on a number of parameters, those related to the vehicle of the policyholder (such as type of vehicle and year of manufacture), and those related to the nature of the policyholder (such as the age of the driver and claims history). Underwriting is partly through the actual tariff, and partly through a system of procedures which are intended to check the claims history of the policyholder including presentation of proof of "no-claims" from the previous insurer for the last three years, proof of updated protection, which are integrated automatically when issuing the policies. In most cases, motor vehicle property insurance policies are issued for one year. In most cases, claims for these policies are made close to the time that the insurance incident occurs.

Property insurance provides policyholders with coverage for physical damage to their property. The main risks covered by property insurance are risks of fire, explosion, break-in, earthquake and damage by natural forces. Property insurance sometimes includes coverage for for loss of profits following physical damage to the property. Property insurance is an important part of residential, merchant, engineering, and cargo (maritime, land, air) insurance policies. In most cases, claims against these policies are settled close to the date of the insurance event.

The insurance company abroad, taking into account the geographic area in which it operates, is exposed to risk due to disasters, including hurricanes, hail storms, tornadoes and fire, such as hurricane Ike and Gustav in September 2008, and Katarina and Rita in August and September 2005. In addition, in 2008, wind, hail and tornadoes caused record damages. It is difficult to foresee the occurrences of these events with statistical accuracy or to estimate the extend to the damage that may be caused. The scope of losses from the disasters depends on various factors, including the exposure of the policyholders in the area of the event, scope of reinsurance and increase in premiums, and unexpected changes in insurance coverage due to regulatory or legal procedures following catastrophe.

C-140 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 31 – INSURANCE RESERVES AND OUTSTANDING CLAIMS (CONTD.)

E. Insurance risks (contd.)

2. Insurance risk in general insurance contracts (contd.)

Principles for calculating actuarial valuations in general insurance

General

a) Liabilities in respect of general insurance contracts include the following main components:

− Provision for unearned premium − Premium deficiency − Outstanding claims − Deferred acquisition costs:

The provision for unearned premium and excess of income over expenses is calculated independently of any assumptions and accordingly, is not exposed to the reserve risk. For the manner in which these provisions are calculated, see the note on accounting principles.

b) According to the Supervisor's directives, the outstanding claims are calculated by an actuary, according to standard actuarial methods and consistently with the previous year. The selection of the appropriate actuarial method for each branch of insurance and for each year of occurrence/underwriting, is based on the compatibility of the method to the branch and sometimes there is a combination of methods. The valuations are primarily based on past experience of the development of claim payments and/or development of the amount of the payments and specific estimates. The valuations include assumptions regarding the average cost of claim, cost of handling the claims and frequency of the claims. Additional assumptions may address changes in interest rates, exchange rates and timing of payments. Payment of claims includes direct and indirect expenses of settlement less claims recoveries and deductible.

c) The use of actuarial methods that are based on the development of the claims is mainly adequate when there is stable and sufficient information regarding the payment of the claims and/or the specific valuations in order to estimate the total expected cost of claims. When the available information in handling the claims is insufficient, sometimes the actuary uses a computation which weighs between the known estimate (in the company and/or the branch) such as LR and the actual development of the claims. Greater weight is given to the valuation based on experience as time passes and additional information is accumulated for the claims.

d) Quality valuations and judgments are also taken into account as to the degree that past trends will not continue in the future. For example: due to a one time event, internal changes such as change in the portfolio mix, underwriting policy and handling procedures of claims and in respect of external factors such as legal ruling and legislation. If the above changes were not fully reflected in past experience, the actuary updates the models and/or makes specific provisions on the basis of statistical and/or legal estimates, as appropriate.

e) In several large claims with non-statistical profile, the reserve (in gross and on retention) is determined on the basis of the opinion of the company's experts and in accordance with the recommendations of their legal advisors.

f) The reinsurers share of the outstanding claims is calculated according to the type of agreement (proportionate or unproportionate), actual claims experience and the premium that was transferred to the reinsurers

g) The evaluation of the outstanding claims for the Company's share of the pool in incoming transactions and joint insurance received from other insurance companies (leading insurers) was based on a calculation made by the pool or by the leading insurers or by the Company.

C-141 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 31 – INSURANCE RESERVES AND OUTSTANDING CLAIMS (CONTD.)

E. Insurance risks (contd.)

2. Insurance risk in general insurance contracts (contd.)

Actuarial methods in main insurance branches:

(a) Motor property

In the motor property branch, the liabilities are calculated on the basis of the development of payments and/or development of outstanding claims model (link ratio / chain ladder), with reference to the types of coverage, such as comprehensive, third party, types of vehicles, such as 4-ton and over 4-ton and types of damage, such as accident, theft and natural disasters. For recent months of damage, which are not mature, use was also made in the averages method in determining the cost of claim per policy.

There are separate estimates of the claims department in the following cases:

− Old claims − Claims for car theft and natural damages

The individual estimates take into account the deductibles.

Subrogation and remnants are taken into consideration and the actuarial model takes into account the development of all the payments (positive and negative). In addition, there is a model for estimating the amount of the expected subrogation.

A provision was calculated for indirect expenses for settling claims.

(b) Compulsory motor insurance

In the compulsory motor insurance branch, liabilities are calculated on the basis of the payments development model and outstanding claims development model (link ratio / chain ladder). For later underwriting years, the cost of claims is based on the LR rate and the payments development model and/or outstanding claims development model (Bornhuetter-Ferguson). The tail of the development is calculated on the basis of the Sherman model.

There are separate estimates of the claims department in the following cases: − Old claims − Particularly large claims

The outstanding claims are estimated separately on the gross level and on the reinsurance level.

Estimating the share of the reinsurer in claims for excess for the last three underwriting years is calculated according to a percent of the reinsurance premium, taking into account known claims for these years. For claims that occurred in a prior period, the estimate is according to the actual claim.

Estimates for facultative reinsurance is made in a separate model (gross and retention).

The individual estimates take into account the deductibles. Subrogation and remnants are taken into consideration and the actuarial model takes into account the development of all the payments (positive and negative).

A provision was calculated for indirect expenses for settling claims.

The valuation of the outstanding claims for the Company's share of the pool in based on the calculation made by the Association of Insurance Companies in Israel (“the pool”).

C-142 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 31 – INSURANCE RESERVES AND OUTSTANDING CLAIMS (CONTD.)

E. Insurance risks (contd.)

2. Insurance risk in general insurance contracts (contd.)

Actuarial methods in main insurance branches: (contd.)

c) Property and other branches

In the property and other branches, liabilities are calculated on the basis of the payments development model and outstanding claims development model (link ratio / chain ladder). For periods that are not mature, use was also made in the averages method in determining the cost of claim per policy.

There are separate estimates of the claims department in the following cases: − Old claims − Claims for car theft and natural damages

The outstanding claims are estimated separately on the gross level and on the reinsurance level. The share of the reinsurer for excess is based on estimation of the actual claim. Estimates for facultative reinsurance is made in a separate model to claims in branches in which the share of the reinsurer is material. The individual estimates take into account the deductibles. Subrogation and remnants are taken into consideration and the actuarial model takes into account the development of all the payments (positive and negative). A provision was calculated for indirect expenses for settling claims.

d) Branches in which actuarial assessment is not made

Property loss, engineering insurance, insurance of freight, marine hull and aircraft, and incoming business include outstanding claims on the basis of a separate evaluation of each claim according to an opinion received from Company lawyers and experts who handle the claims and ceding companies for incoming business, with the addition of IBNR if necessary.

Assumptions and essential models for determining insurance liabilities in general insurance:

Chain latter/link ratio

These methods are based on the development of historical claims (such as development of payments and/or development of amount of payments, and valuations of the individual claims and development of the number of claims), in order to valuate the anticipated development of existing and future claims. The use of these methods are mainly suitable after a sufficient period since the event occurred or the policy is underwritten, when there is enough information from the existing claims in order to evaluate the total anticipated claims. The difference between the methods is due to the method for calculation of the average development (simple or weighted average). In branches with highly diverse claims, as well as the average development coefficient, the standard deviation of the development coefficients is calculated.

Bornhuetter-Ferguson (BF)

This method combines early estimates known in the company or branch, and an additional estimate based on the claims themselves. The early estimates utilize premiums and loss ratio for evaluating the total claims. The second estimate utilizes actual claims experience based on other methods (such as chain ladder). The combined claims valuation weighs the two estimates, while greater weight is given to the valuation based on the claims experience as time passes and additional information is accumulated for the claims. This method is mainly used when there is insufficient information.

C-143 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 31 – INSURANCE RESERVES AND OUTSTANDING CLAIMS (CONTD.)

E. Insurance risks (contd.)

2. Insurance risk in general insurance contracts (contd.)

Actuarial methods in main insurance branches: (contd.)

d) Branches in which actuarial assessment is not made (contd.)

The averages

At times, as in the Bornhuetter-Ferguson method, when the claims history in the last periods is insufficient, the historical average method is utilized. In this model, the claims cost is determined based on the average cost of the claim per policy for earlier years and the number of policies in the later years. Another method for calculation is the multiplication of the cost of the historical claim for the policy and the number of policies in the relevant period.

Sherman model

This is a mathematic model used to adjust non-linear distribution with development coefficients calculated using chain latter/link ratio models. Through the distribution, it is possible to calculate the development coefficients for prior periods for which information is not available (development tail).

The main assumptions taken into consideration in the actuarial valuation:

(a) Outstanding claims in the compulsory motor insurance and liability branches were discounted at an annual interest rate of 3% or a risk-free interest, whichever is lower.

An increment was included for the risk margin (standard deviation) in the base of the reserve in the compulsory motor insurance and liability branches.

b) In foreign insurance companies, outstanding claims were not discounted and no increment was included for risk margin (standard deviation).

c) The basic assumption for each calculation method is that the historical behavior of the claims reflects the future behavior.

d) When analyzing development of payments, insurance companies in Israel add a claims tail according to the Sherman model.

C-144 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 32 – PROVISIONS AND OTHER LIABILITIES

December 31 2009 2008 NIS millions

Liability for remediation of environmental hazards 76 92 Costs for divesture of assets 63 65 Institutions - 189 Liability for the issue of blocked shares in a subsidiary – see Note 9(J)(d)(1) 66 75 Liability for acquisition of shares of a subsidiary from non-controlling interests (1) 431 - Deposit from tenants - 109 Other 203 90

839 620

(1) See Note 14C(1) (2) At December 2009, includes NIS 118 million for deposits received from tenants in protected housing, and NIS 18 million for cash-settled share-based payment.

NOTE 33 – CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS

A. Contingent liabilities

There are contingent claims, including motions for certification as class action suits, against certain investees for significant sums that might reach several hundred million or even billion shekels. In some cases, it is not possible to assess their outcome at this stage, and therefore no provision was recorded in the financial statements.

Details of the material claims filed against the Group companies are provided below:

1. Several law suits amounting to several hundred million shekels have been filed against Gadot Biochemical Industries Ltd. (hereinafter: Gadot) and others, for bodily injury and damage to property with regard to Gadot’s activity in the Kishon River area (for details, see Gadot’s financial statements, which are available to the public).

Most of these suits are currently in the very early stages. In some cases, proceedings are yet to begin and in others, proceedings have only reached the preliminary stages. In some of the cases, evidentiary sessions are yet to be held and in most cases, the parties have not yet submitted all of the opinion papers and affidavits. Furthermore, in these cases there are serious factual disputes and there are many facts that need to be decided and are unknown to Gadot. Moreover, the aforementioned proceedings are very complex and problematic since, among other reasons, most of the suits pertain to ongoing events that occurred over decades, in which a very large number of entities are involved, including the State and local authorities, therefore it is not possible to assess the responsibility and the share of any one entity involved in the suits. It is also scientifically difficult to determine the degree of causal connection between the discharge of industrial wastewater and the damages alleged by the plaintiffs. In the estimate of the Group’s management, based on the assessment of the management of Gadot and the opinion of legal counsel, considering all of the uncertainties existing in the entirety of these cases and because of the complexities and inherent difficulties therein, the chances of the aforementioned suits and proceedings cannot be assessed at this stage and therefore provisions in their regard have not been included in these financial statements.

C-145 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 33 – CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS (CONTD.)

A. Contingent liabilities (contd.)

2. In November 2006, three motions for certification as class actions were filed against Delek Israel, third parties and also against the former deputy CEO of Delek Israel, Mr. Yisrael Chelouche. The applicants claim that Delek Israel, together with the other defendants, acted, inter alia, in a fraudulent, misleading and negligent manner and violated their statutory duty. The motions and claims were filed following an investigation by the Israel Police concerning the dilution of fuels at several gas stations marketing Delek Israel fuels and in view of possible damages that may have incurred as a result of this. The motions amount to NIS 1.4 billion.

In all of these proceedings, Delek Israel filed motions for summary dismissal, motions to try all three proceedings before the same judge and motions to extend the deadline for the submission of a response to the motion for approval until after the hearing on the summary dismissal. The court granted the motion to try the proceedings before the same judge.

In the third quarter of 2007, one motion, in the amount of NIS 90 million, was stricken off by consent and the court ordered the combination of the two remaining motions into one. Following combination of the two motions, the amount of the motion for approval as a class-action was reduced from NIS 1.4 billion to NIS 554 million. Similarly the former Deputy CEO of Delek Israel was removed from the petition. The applicants filed a motion for a continuance in the proceedings in the motion for certification as a class action until receipt of a peremptory decision against the additional defendants (but not against Delek Israel) in a criminal proceeding instituted against them. The court allowed a continuance in the proceedings until a decision is made in a criminal proceeding. Delek Israel filed a motion for leave to appeal the decision for a continuance in the proceedings and in August 2009, the court denied the motion for leave to appeal and upheld the stay of proceedings.

The management of Delek Israel estimates, based on the opinion of its legal counsel, that until the applicants submit a response to Delek Israel’s response in respect of the motion for approval as a class action, and until the decision that the proceedings will be delayed until a decision is given in the criminal proceeding and the criminal proceeding is still in progress, the chances of the motion cannot be assessed and therefore no provision was made for them in the financial statements.

3. In May 2007, a motion for certification as a class action suit was filed against Delek Israel and other Delek companies (“the defendants”). A revised motion was filed in June 2008. According to the plaintiffs, the defendants unlawfully collected service fees without the appropriate price marking. The defendants estimate that if the motion is approved as a class action, the overall sum of the suit (against all the defendants) will be at least NIS 491 million.

Delek Israel rejects the allegations of the plaintiffs in respect of the marking, and the management of Delek Israel estimates, based on the opinion of its legal counsel, that it is unlikely that the application for certification will be approved in respect of financial payment and therefore no provision was made in the financial statements. In April 2009, a joint motion to dismiss was filed and the motion was accepted, ending this proceeding.

4. In December 2007, a motion for certification as a class action suit was filed against Delek Israel and other Delek companies (“the defendants”). The plaintiffs contend that extra payment was collected at gas stations for service at night and on days of rest, from July 14, 1993 through to May 30, 2002, in contravention of the Control of Product and Service Prices Law (Temporary Order), 5745-1985. The plaintiffs estimate that Delek collected NIS 22 million in the relevant period. Pursuant to the court order, the legal counsel submitted his position according to which the plaintiffs’ position that the fuel companies were not allowed to collect an extra payment for service in the relevant period is incorrect. In addition, the court ordered summary arguments by the parties.

The management of Delek Israel estimates, based on the opinion of its legal counsel that the chance of the motion is unlikely, therefore a provision was not included in the financial statements.

C-146 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 33 – CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS (CONTD.)

A. Contingent liabilities (contd.)

5. In July 2007, an application for certification as a class action was filed against Delek Israel. The plaintiffs claim that at some of the stations operated by Delek Israel and stations to which Delek Israel supplies fuels, there are fewer self-service pumps than the number required under the Control of Product and Service Prices Ordinance (Maximum Prices at Gas Stations), 5762- 2002, therefore that station is not permitted to charge an additional price for full service, under section 3(C) of the Ordinance. The total amount of the claim is NIS 8 million.

In the pre-trial hearing held in June 2008, the judge ordered the submission of the motion and response to the Attorney General and the Fuel Administration for their position.

On July 20, 2009, the Attorney General submitted his position, which opposes the position of Delek Israel. The management of Delek Israel estimates, based, inter alia, on the opinion of its legal counsel, that it is more likely than not that the motion will not be dismissed, however the proceeding is not expected to have a material effect on the financial statements.

6. In March 2006, a motion for certification as a class action suit was filed against Delek Israel and other Delek companies. The plaintiffs claim that Delek Israel charged disabled persons the full service charge, which may not be charged at stations with self-service pumps when a vehicle bears a disabled tag. The grounds for the claim are violation of the Law for Control of Products and Services, violation of the Law for Equal Rights for People With Disabilities and unjust enrichment.

The plaintiff is suing the entire group of defendants in the amount of NIS 22 million (the plaintiff estimates the share of Delek Israel to be 27% of this amount) for monetary and non-monetary damages without proof of damage, at the discretion of the court.

In May 2008, the parties filed a motion for approval of a settlement, in which it was agreed, inter alia, that the fuel companies will provide people with disabilities with full service at the self-service pumps. In a hearing on the matter of the settlement, it was agreed that the parties will submit an amended agreement. After discussions, the court ordered the transfer of the agreement, as is, to the Attorney General and its publication in accordance with the Class Action Law.

n July 2009, the Attorney General notified the Company that he objects to the settlement. The plaintiff filed a joint motion to dismiss, under the same terms as the terms of the settlement. The management of Delek Israel estimates, based, inter alia, on the opinion of its legal counsel that if the motion for settlement is dismissed, there is a less than 50% chance that the motion will be certified as a class action, therefore a provision was not included in the financial statements.

7. In November 2005, a motion for certification as a class action suit was filed against a subsidiary, Delek Oils Ltd. (“Delek Oils”) and two other Delek companies. The plaintiff’s suit amounts to NIS 450 and the sum of the suit against Delek Oils, if the suit is certified as a class action, amounts to NIS 1.636 billion, as well as compensation of NIS 27.5 million for emotional distress.

The motion for certification as a class action is based primarily on the allegation that Delek Oils marketed engine oils claiming that they are in compliance with certain American and European standards. According to the applicant, such representation is false.

The management of Delek Oils is of the opinion that Delek Oils acted within the law and the engine oil marketed by Delek Oils in Israel does indeed comply with the specifications of the standard.

In November 2007, a settlement was negotiated between Delek Oils (and the other defendants) and the applicant, according to which the motion for certification as class action suit and the suit will be withdrawn and Delek Oils (and the other defendants) will reimburse the applicant for expenses (which are not material).

Accordingly, a joint motion to dismiss was filed in the court. The court ordered the Attorney General to respond to the motion to dismiss.

In March 2009, the settlement agreement was approved and the motion came to an end.

C-147 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 33 – CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS (CONTD.)

A. Contingent liabilities (contd.)

8. In 2002, Solel Boneh Ltd. and other companies filed a monetary claim against the Fuel Administration, Oil Refineries Ltd. (“ORL”), Delek Israel and other companies, in an amount of NIS 27 million, and a claim for declarative relief. The plaintiffs claim they had been charged for an additional price for the supply of products, in contravention of the law.

The plaintiffs are claiming an amount of NIS 4 million from Delek Israel, and another NIS 14 million together with ORL and three other defendants. In November 2009, the court dismissed the claim in full. In December 2009, an appeal on the court ruling was filed and the management of Delek Israel estimates, based on its legal counsel, that the chances of the appeal are unlikely and therefore a provision for this claim was not included in the financial statements/

9. In November 2002, Delek Israel and two other oil companies filed a general claim in the amount of NIS 25 million against the Fuel Administration, Oil Refineries Ltd. (“ORL”) and Petroleum and Energy Infrastructures Ltd. ("PEI”), in respect of an inventory of crude oil that the plaintiffs entrusted in the past to ORL and PEI in accordance with the Fuel Administration's directives, and that ORL refuses to return to the plaintiffs, claiming that it is sludge (unusable sediment of crude oil). The plaintiffs are asking that the crude oil inventory will be returned, along with financial expenses for the period commencing in September 2000 or, alternatively, that they be compensated for the financial value of the inventory and the financial expenses.

The management of Delek Israel estimates, based, inter alia, on the opinion of its legal counsel, that it is likely that the claim will be approved, hence no provision was recorded in respect of the outstanding debt of NIS 11.6 million to the Fuel Administration.

In 2004, the Fuel Administration filed a general claim for NIS 120 million against Delek Israel, three other fuel companies, ORL and PEI. Delek's share in this claim is NIS 50 million. The Administration contends that the companies against which the claim was filed were allegedly negligent in treating the reserve inventory of crude oil, which ORL claims has turned into sludge, and that the Fuel Administration is entitled to reimbursement of amounts paid to the defendants for the storage, financing and insurance of the inventory since 1989 and for the difference in storage fees for delay of transfer of inventory to closed storage. The management of Delek Israel estimates, based, inter alia, on the opinion of its legal counsel, that Delek Israel’s chances of defending itself against this claim are strong and that insofar as the claim is granted, most of the claimed amount will be demanded from ORL and PEI and not the fuel companies, hence a provision for the claim was not recorded in the financial statements. In this context, in December 2005, ORL filed a petition for declarative relief that the crude oil appearing in the lists of PEI as unowned oil belongs in full to ORL and not to the Company and the fuel companies.

These three claims were combined into one case, and the statements of defense will be heard in March 2010.

In September 2008, PEI filed a claim against Delek Israel and other fuel companies in the amount of NIS 33 million. Delek Israel's share is NIS 13.2 million. In the claim, PEI alleges that the companies deposited crude oil at PEI and did not pay storage fees.

The management of Delek Israel estimates, based on the opinion of its legal counsel that the chance of the motion is unlikely, therefore a provision was not included in the financial statements.

10. In August, 2007, the Fuel Administration filed a claim in the amount of NIS 23 million against Delek Israel and other fuel companies, alleging that it is entitled to value differences for emergency inventory, which was dismissed. In August 2000, notices were submitted to third parties against ORL and PEI. The management of Delek Israel estimates, based on the opinion of its legal counsel, that it is unlikely that Delek Israel and the other fuel companies will be required to pay this amount, therefore a provision was not included in the financial statements.

C-148 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 33 – CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS (CONTD.)

A. Contingent liabilities (contd.)

11. Soil and groundwater pollution was discovered in a number of Delek Israel gas stations. In these stations, Delek Israel conducts soil analyses and drillings to the ground water to characterize the nature of the pollution. Delek Israel also received requirements from the Ministry of Environmental Protection and the Water Commission to conduct tests to locate soil and water damage in a number of other stations.

Delek Israel, based on past experience, included a provision of NIS 5 million in its financial statements for expected costs required to correct the aforesaid pollution.

In addition, a statement of claim was filed against Delek Israel and its officers, in respect of environmental matters. The statement of claim was filed in respect of alleged pollution of soil and groundwater, and it was filed against the CEO of Delek Israel, VP sales and a number of marketing personnel in the Company. To date, the statement of claim has been read. An evidentiary hearing set for January 10, 2008 was postponed to April 2, 2010.

12. The Ministry of the Environment has notified a subsidiary of Delek Israel, that should it emerge that environmental damage has been caused during the 40 years of Delek Israel’s operation in the Ashdod facility, it will be required to remediate the environmental hazards prior to leaving the facility. The management of the subsidiary estimates, based, inter alia, on the assessment of the subsidiary's management, on drillings that surveyed the possibility of soil and underground water contamination in the area of the facility, and on the opinions of its legal counsel, that the risk of considerable investment in soil purification expenses is low, therefore n o provision was made in the financial statements.

13. In August 2008, an application was filed for certification as a class action in the amount of NIS 150 million against Delek Israel and a number of other fuel companies. In accordance with the statement of claim, the defendants did not abide by their legal obligation to produce invoices for fuel purchases on paper that is durable for at least seven years (for submission to the tax authorities). In July 2009, the parties reached a settlement to dismiss, which was given the validity of a judgment. The expenses of Delek Israel were not material.

14. In November 2008, an application for certification as a class action was filed against Delek Israel. According to the applicant, due to the delay in installation of a vapor balance system at Delek Israel’s fuel terminal in Haifa, the applicant, residents of the Haifa Bay area and other people who were in the area during the period of the delay (allegedly from August 1, 2005 to April 22, 2007) non-monetary damage and emotional distress was caused in the amount of NIS 2,000 per person. The applicant did not specify the amount in the claim for all members of the group.

On March 30, 2009, Delek Israel submitted a response, claiming that the application should be summarily dismissed. On April 6, 2009, in the hearing of the application, the court proposed that the parties agree to a continuance of the class action proceedings until the ruling in another case against Delek Israel, relating to a similar issue of a continuance of class-action proceedings until the ruling on the criminal proceeding. As the criminal proceeding ended in a settlement, the claim that the grounds for postponing the proceedings are no longer relevant and under these circumstances, a pretrial hearing was set for the end of March 2010.,

The management of Delek Israel estimates, based, inter alia, on the preliminary opinion of its legal counsel and considering the ruling and judgment in the criminal procedure, that the likelihood of the claim being certified as a class action is less than 50%, therefore a provision was not included in the financial statements.

C-149 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 33 – CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS (CONTD.)

A. Contingent liabilities (contd.)

15. A statement of claim was filed against Delek Israel and four other defendants (including the CEO of Delek Israel and a director in the Group), for the alleged operation of the Haifa plant without a business license and for causing unreasonable air pollution, due to the failure to install fume pumps in the Haifa plant. In October 2009, a settlement was achieved that received the validity of a judgment, according to which the four defendants were stricken from the statement of claim and the statement of claim was amended to a management of a business contrary to the terms in the business license. In addition, Delek Israel agreed to install fume pumps in the gas stations it owns, for five years from the ruling. Delek Israel was fined in an amount that is not significant.

16. In June 2009, a motion for certification as a class action was filed against Delek Israel and against a wholly-owned partnership (Delek Retail) and other Delek companies.

The applicants claim that the respondents, including Delek Israel, misled them and the other members of the group (consumers of 96 octane gasoline in Israel) and charged them an inflated price for 96 octane gasoline. The applicants claim that from February 3, 2009, there is no difference between 96 octane gasoline and 95 octane gasoline, therefore there is no reason for the different gasoline prices. The grounds for the claims are as follows: Misleading consumers, fraud under section 56 of the Torts Law, taking advantage of a person’s distress, unjust enrichment, negligence and false representation. The applicants estimate their claim at tens of millions of shekels in the relevant period (about four months). At the end of December 2009, a pre-trial hearing was held. Following this hearing, the parties started to advance the possibility of a settlement.

Subsequent to the reporting date, in March 2010, the two parties filed a motion to dismiss. The motion was accepted by the court and the motion was dismissed.

17. In October 2009, a claim and application for its certification as a class action was filed against Delek Israel and against other fuel companies (“the defendants”). According to the claim and application for certification, when refueling at automatic pumps, the pumps start working immediately after entering the payment method, before fuel starts to flow from the pump and before the pump and payment meters start to run. The applicant alleges that in this way, tens of agurot are charged for fuel that has not been supplied and consumed whenever refueling at an automatic fuel pump at Delek Israel stations.

The applicant is claiming declaratory relief, ordering Delek Israel to stop collecting these amounts and to refund any overpayment that was allegedly charged by Delek Israel. The total claim amounts to NIS 124.3 million. The proportionate share of Delek Israel in this amount is NIS 42.4 million.

The Group estimates, based, inter alia, on the opinion of its legal counsel, that at this stage, it is not possible to assess the outcome of the claim and the amount involved, should the claim or the class action be accepted, therefore provisions in this respect have not been included in these financial statements.

18. In October 2009, an application for certification as a class action was filed against Delek Israel. According to the claim, fuel vapor penetrated into packages of mineral water that were sold by Delek Israel and other companies after they were allegedly stored near the fuel pumps at the fuel stations. The application amounts to tens of millions of shekels.

The management of Delek Israel estimates, based, inter alia, on the opinion of its legal counsel that the chance of the motion is unlikely, therefore a provision was not included in the financial statements.

C-150 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 33 – CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS (CONTD.)

A. Contingent liabilities (contd.)

19. On November 30, 2009, an motion for certification as a class action was filed against Delek Israel and against its subsidiaries: Shaarei Delek Development and Management Registered Partnership 1994, Delek S. Clali Ltd. and Delek Menta Road Retail Ltd. ("the motion"). The plaintiff contends that in a number of stations, the defendants did not place a sign in the lane leading to the gas station, with the price of self-service and full-service fuel, and in cases where a sign had been placed, it only included the price of self-service fuel. The plaintiff contends that in the absence of an appropriate sign, the defendants are not entitled to charge service fees for fueling and he is demanding reimbursement of the extra amounts collected. The amount of the claim is NIS 11 million and it was calculated in accordance with the total service fees, which the plaintiff estimates was collected over 12 months in the stations.

The management of Delek Israel estimates, based, inter alia, on the opinion of its legal counsel that in view of the preliminary stage of the proceedings, it is not possible to estimate the chances of the application. However, based on the preliminary assessment, Delek Israel has strong claims in respect of the application for certification as a class action, therefore a provision was not included in the financial statements.

20. A number of claims were filed against Delek Israel, in the course of regular business, totaling together NIS 130 million. The management of Delek Israel estimates, based on the opinion of its legal counsel, that the majority of cases are unlikely to succeed, and adequate provisions have been made for them in the financial statements.

21. A number of legal claims were filed against Delek Benelux in the course of regular business, in a cumulative amount of €19 million, The management of Delek Benelux estimates that it is unlikely that the claim will be accepted, therefore a provision was not included in the financial statements.

22. Further to the contents of Note 14 in respect of the fire in the refinery, the circumstances of the event are being investigated by a number of entities, including an internal investigation by Delek USA, the department for occupational safety and health, the US Chemical Safety and Hazard Investigation Board and the US Environmental Protection Agency. In May 2009, the department of occupational safety and health completed the investigation and issued a notice estimating a fine of $0.2 million. Delek USA is appealing this notice and does not believe that the result will have a material effect on its business. Delek USA is unable to accurately assess the results of the other examinations, including possible fines or other enforcement activities, however it estimates that the existing procedures will not have a material adverse effect on its operations.

23. A subsidiary in the USA, Delek Refining Inc. (”Delek Refining”), is subject to the provisions of the law, regulations, licenses and environmental supervision set by the competent authorities in its field of business at the federal, state and local levels. These provisions pertain to Delek Refining's entire activity, both in the field of refining and of the fuel products that it produces, and in the field of transportation (the oil pipe). The environmental legislation is complex, and is constantly changed and updated.

The main legislation in the area of environmental controls relating to Delek Refining’s operations is with respect to the matter of air quality, quality of liquid waste, solid/toxic waste and the prevention of ground and groundwater contamination.

The environmental authorities in the United States conducted two investigations against the former owners of the refinery and the pipeline, following the discovery of contaminants in the soil and in the underground water in the area of the refinery and the pipeline. The remediation and purification processes of the said contaminants has yet to be completed.

C-151 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 33 – CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS (CONTD.)

A. Contingent liabilities (contd.)

23. (contd.) As part of the acquisition of the refinery and the oil pipe, Delek Refining assumed the liability for the existing contaminants, in respect of which the investigation and the remediation and purification processes are still ongoing, as well as the liabilities imposed on the previous owners in respect of the said contaminants, in an amount that is estimated by Delek Refining at $8 million. Delek Refining is not entitled to indemnification by the former owners in respect of environmental damages known to it at the acquisition date, however it is entitled to a limited (in amount and time) indemnification in respect of costs that it may incur in the future due to the discovery of environmental damages that were caused prior to its of the refinery, but were unknown at the time.

It is further noted that Delek Refining acquired an environmental insurance policy, that covers certain environmental damages that may be discovered in the future.

24. In September 2007, a claim was filed against Yam Tethys Ltd. (a company owned by the partners in the Yam Tethys project) and others, by trawling fishermen for damages allegedly incurred as a result of a reduction in the areas in which they can trawl as a result of the construction of the gas rig and pipeline. The claim amount is NIS 35 million.

The initial pre-trial hearing is set for May 11, 2010, after arbitration of the case failed. The case is in the preliminary stages, the plaintiffs have yet to file a response and no preliminary procedures have taken place between the parties. Therefore, taking into account the precedential questions entailed on the efficiency and complexity of the case, in that there are several factual and legal disputes between the parties and in view of the evidence available at this stage, including that an opinion is yet to be prepared in respect of the damage by the defendants, the legal counsel of Yam Tethys estimates that at this stage, the chances of the claim cannot be assessed.

25. Republic is a party to the claims submitted against it in the regular course of business, The management of Republic estimates that the outcome of the claims will not have a material negative effect on its financial position and operating results.

In 2006-2008, motions for certification as class action suits were filed against subsidiaries of Republic, following Hurricane Katarina that hit Louisiana in 2005. The plaintiffs contend that the subsidiaries are in breach of their insurance policies because they did not pay insurance claims as appropriate and did not apply the law properly on various matters

These proceedings are in the preliminary stages and have not yet been certified as class actions, therefore at this stage, the management of Republic is unable to estimate the outcome of these proceedings and therefore provisions in their regard have not been included in these financial statements.

26. Motions for certification as class action suits against The Phoenix

The Phoenix has general exposure, which cannot be estimated or quantified, due, inter alia, to the complexity of the services provided by The Phoenix to its policyholders and members. The complexity of these arrangements includes potential for claims of interpretations and other due to differences in information between The Phoenix and the other parties to the insurance contracts referring to a range of commercial and regulatory terms. It is impossible to predict the types of claims that will arise in this area, and the exposure arising from these and other claims in respect of the insurance contracts, through the hearings mechanism set out in the Class Actions Law.

C-152 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 33 – CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS (CONTD.)

A. Contingent liabilities (contd.)

26. Motions for certification as class action suits against The Phoenix (contd.)

There is also general exposure arising from complaints against the institutional entities in The Phoenix, including complaints to the Commissioner of the Capital Markets, Insurance and Savings in the Ministry of Finance in respect of the rights of the policyholders in accordance with insurance policies and/or the law. These complaints are handled routinely by the ombudsman in institutional entities. Any ruling of the Commissioner in respect of these complaints could be made as lateral rulings, which apply to lateral groups of policyholders. Sometimes, the complaining entities threaten to instigate class actions suits in respect of their claim Due to the preliminary state of the proceedings, it is impossible to estimate whether the Commissioner will hand down a lateral ruling for these complaints and whether a class action will be filed as a result of these proceedings, and it is also impossible to estimate the potential exposure for these complaints. Therefore, a provision was not made for the exposure.

In respect of the motions for certification as a class action set out in sections A-Q below, the management of The Phoenix estimates, based, inter alia, on the opinion of its legal counsel, that it is more likely than not that the statements of defense of The Phoenix and/or subsidiaries of The Phoenix will be accepted and the motion for certification as a class action is more likely than not to be rejected, and are not covered by a provision in the financial statements. Provisions were included in the financial statements to cover the exposure estimated by the Company or the subsidiary for motions for certification as class action lawsuits in which it is more likely that the Company's statement of defense will be dismissed.

In the opinion of the management of The Phoenix, based, inter alia, on legal opinions, the financial statements include appropriate provisions of NIS 25 million, where provisions are required to cover the estimated exposure.

At this preliminary stage, it is not possible to assess the likelihood of the motions for certification as a class action described in sections R-T below, which were recently filed against subsidiaries of The Phoenix, hence no provision was included in the financial statements in respect of these claims.

Following is a summary of the motions for certification as class actions, amounts of the claims included in the motions and report of their status close to the approval date of the financial statements. For further details, see the statements of The Phoenix, which are issued to the public.

A. On June 19, 2000, two couples filed a lawsuit in the District Court of Tel Aviv against Discount Mortgage Bank Ltd. (“the bank”) and The Israel The Phoenix Insurance Company Ltd. (“The Phoenix Insurance”). The lawsuit argues that the plaintiffs have obtained from the Bank loans for the purpose of purchasing residential apartments secured by a mortgage, and in frame of this loan the Bank required them to purchase homeowners insurance policies for their apartments from Phoenix Insurance. According to the plaintiffs, the initial insurance amount set for their apartments was higher than the proper reinstatement value of the apartments, and in December 1993 and December 1994, the insurance amounts for their apartments were increased, with no justification and on no reasonable ground. Therefore, the plaintiffs claim to have paid excessive insurance premiums over the years, and have accordingly petitioned for reimbursement of the excess insurance premiums that they paid. The plaintiffs filed a motion for certification of their suit as a class action suit. The plaintiffs estimate the amount of the class action at NIS 105 million. The proceedings in this claim have continued over several years and there have recently been significant delays in the proceedings of the claim. The stay of proceedings in the claim may continue for a long period, and there is a real chance that the proceeding will not be renewed in the future.

C-153 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 33 – CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS (CONTD.)

A. Contingent liabilities (contd.)

26. Motions for certification as class action suits against The Phoenix (contd.)

B. In April 2003, a claim was filed against The Phoenix Israel Insurance Company Ltd. and other insurance companies, together with a motion for certification as a class action (Civil Case 1498/03 Miscellaneous Civil Motions 8673/03). The cause of the claim is the unlawful collection for several years of stamp duty payable for insurance agreements under the Stamp Duty on Documents Law, 5721-1961. The plaintiff contends that by collecting stamp duty from the policyholders, The Phoenix Insurance has enriched itself unjustly at his expense, since the tax is payable by it, and is therefore liable to refund the amounts it collected and transferred to the Ministry of Finance The total amount of the claim is approximately NIS 95 million. In a ruling on July 7, 2009, the motion for certification as a class action was approved (including the claim against The Phoenix) in respect of half of the amount of tax duty collected from the policyholders. On March 2, 2010, another pretrial hearing was held in the Tel Aviv District Court, in which a date for another pretrial hearing was set for April 21, 2010, to outline the second stage of the hearing (after receiving the application for certification as a class action).

C. On October 19, 2004 a claim was filed against Hadar Insurance Company Ltd. ("Phoenix Insurance”), accompanied by a motion to approve the claim as a class action suit. The claim involves the payment of motor motor insurance benefits in "total loss" cases. The plaintiffs claim that in total loss cases, Phoenix Insurance does not pay the full insurance benefits that allegedly correspond to the car’s full list price, but rather deducts from the value of the vehicle various amounts in respect of special variables associated with the vehicle price-list, that may affect its value. The plaintiffs argue that in so doing without notifying the policyholders when quoting the price of the insurance policy or when entering into the insurance contract, Phoenix Insurance allegedly misleads all policy holders and is in breach of statutory duty in view of the relevant guidelines of the Insurance Supervisor. The plaintiffs set the claim amount at approximately NIS 41 million. On January 14, 2010, the district court accepted the application for certification as a class action. The Phoenix intends to file a petition to appeal this decision, and accordingly the court extended the date for an application for leave to March 18, 2010. In this context, on February 18, 2010, The Phoenix filed a petition for a continuance of the proceedings to investigate the class action until (and subject to) the ruling of the application for leave to appeal. On February 23, 2010, the district court accepted the petition for a continuance and set an internal hearing for June 1, 2011.

D. On April 25, 2006, a motion for certification as a class action was filed by Zevulun Valley Metal Coatings Company Ltd. and others against Migdal Insurance Company Ltd. and other insurance companies, including The Phoenix Insurance, involving disability insurance policies (Civil Case 1519/06, at the District Court in Tel Aviv). In brief, the plaintiffs argue that the defendants charge in frame of these policies monthly premiums for a “waiting period”, namely the period commencing on the date of the event due to which the policyholder is disabled, and ending after a period of time set in the policies that are the subject matter of the claim – three months. Only after the waiting period is over, and provided that the policyholder is still disabled, the insurance company commences paying the insurance fees, commencing on the said date. The plaintiffs argue that the policies that are the subject matter of the claim, that are issued as aforesaid by various insurance companies including The Phoenix Insurance, include another precondition for payment of the insurance benefits, that pertains to the date on which the insurance company will cease payment of the insurance fees, namely the end of the period specified in the policy. In all policies that are the subject matter of the claim, the end of the period is the date set as the end of the policy term, the end of the insurance year in which the policyholder turns 65, cancellation of the life assurance policy to which the disability policy was attached, or the death of the policyholder.

C-154 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 33 – CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS (CONTD.)

A. Contingent liabilities (contd.)

26. Motions for certification as class action suits against The Phoenix (contd.)

D. (contd.) The plaintiffs argue that if the insurance event occurs in the period commencing three months prior to the end of the term of the disability policy, in no case will the policyholder be eligible for insurance benefits. The plaintiffs claim that in such a case, the policy term will have already ended on the date on which the eligibility for insurance benefits is created, following the waiting period, and from this date on the insurer would no longer be required to pay insurance benefits. The damage claimed by the plaintiffs is the insurance fees paid in the period when no coverage was provided. According to an expert opinion obtained by the plaintiffs, the preliminary estimate of the damage for the years 1998-2004 for the five insurance companies being sued is approximately NIS 47.6 million, and the estimated damage attributed to Phoenix Insurance is approximately NIS 8.12 million. On February 3, 2009, the court accepted the motion of the plaintiffs and certified their claim against all the defendant insurance companies as a class action. On February 16, 2009, the defendants (including Phoenix Insurance) filed a motion for a stay on the class action proceedings until the ruling on the right to appeal which the defendants intend to file. On April 7, 2009, the court approved the motion for a stay. On May 25, 2009, a motion to appeal this ruling was filed at the Supreme Court, which was dismissed by the Supreme Court on November 24, 2009, without requiring the response of the defendants. On April 26, 2009, The Phoenix filed a petition with the Supreme Court to appeal the ruling of the court for certification as a class action. On November 12, 2009, the plaintiffs filed their response to the petition to appeal. A hearing of the appeal is set for November 15, 2010.

E. On December 19, 2006 a claim was filed with the District Court of Tel Aviv against Phoenix Insurance, accompanied by a motion for certification as a class action suit, which Phoenix Insurance received on December 25, 2006. The lawsuit and the motion to approve it as a class action involves a matter that falls in frame of the “disability by accident” annex that is added, at the policyholder’s request, to the life assurance policy (the appendix). This appendix contains a table listing the financial compensation rates to be paid out of the full insurance amount in respect of various bodily injuries, such as the loss of a leg or an arm. The Phoenix pays compensation based on the disability grade determined in respect of the organ injured, thus limiting its liability under the policy. The cause of the claim on which the claim relies is, inter alia, breach of the duty of disclosure prescribed in insurance laws, including in the Control of Financial Services (Insurance) Law, 5741-1981 and the regulations enacted in virtue thereof, misleading representation, breach of contract, imposing an obligation in bad faith, breach of fiduciary duty and unjust enrichment. The plaintiff claims, on his behalf and on behalf of the class, that he is entitled to receive appropriate compensation out of the full insurance amount denominated in the policy, according to the disability grade set or to be set, as opposed to the amount paid by the lower relative disability rating as calculated by Phoenix. The remedy requested by the plaintiff is that Phoenix be required to pay the difference between the compensation due under the policy, according to the plaintiff, and the actual compensation paid, for the entire class. The plaintiff’s own damages were set at approximately NIS 77 thousand, whereas for the entire class the plaintiff does not have at his disposal data allowing calculation of the total damage. On December 5, 2007, the Attorney General announced his decision to hear the case, by virtue of the authority conferred upon him, after seeing that the "right of the State of Israel or public interest could be affected by or are involved in the proceedings”. On May 1, 2008, the Attorney General's position was received, supporting the position of the Insurance Supervisor, which is the basis for the claim. On January 11, 2009, subsequent to the hearing and written summations, the court ruled to certify the claim as a class action suit. The Phoenix appealed the ruling. A hearing of the appeal is set for October 25, 2010.

C-155 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 33 – CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS (CONTD.)

A. Contingent liabilities (contd.)

26. Motions for certification as class action suits against The Phoenix (contd.)

F. On May 20, 2007, a statement of claim and a motion for certification as a class action suit were filed against Phoenix Insurance in the District Court in Tel Aviv. The claim and the motion pertain to the alleged collection of illegal payments, collected and being collected by Phoenix Insurance from its policyholders who have purchased from it life insurance policies. The plaintiffs claim that Phoenix Insurance is in the habit, when entering into life insurance policies with its policyholders, of charging from the policyholders, among them the plaintiffs, premium from the 1st of the month in which they have entered into the policy with Phoenix Insurance. Even when the engagement was initiated by the policyholder subsequent to the 1st of the month, and at times even at the end of the month. This while, the plaintiffs argue, Phoenix Insurance does nor provide the relevant insurance coverage for the entire period commencing on the 1 of the relevant month and until the date on which the premium was first paid, or alternatively, until the date on which Phoenix Insurance has first entered into the policy with the policyholders. In its argued action, the plaintiffs claim, Phoenix Insurance has misled its customers while breaching the bona fide duty against them, and that they and the group that they are asking to represent are entitled to reimbursement for the excess part of the premium that was illegally charged from them. In frame of the claim, the plaintiffs are asking the court to set the date as of which Phoenix Insurance was entitled to charge a premium. The plaintiffs also ask to be reimbursed for the excess premium allegedly collected. The plaintiffs set the amount of the personal claim at NIS 372. It is noted that the amount of the claim in the statement of claim, if the class action is approved, is NIS 21 million. Phoenix Insurance has yet to respond to the claim. It is noted that a statement of defense will only be filed after the ruling on the application for certification as a class action.

On February 8, 2010, the court ruled to strike out the claim due to inaction. On February 11, 2010, the plaintiffs filed an urgent motion to dismiss the ruling to strike out the claim due to inaction, and asked for permission for the parties to file a settlement for the approval of the court by February 25, 2010. On February 15, 2010, the court accepted the request. On March 17, 2010, a settlement signed by the parties was submitted to the court. The settlement does not state an amount, but rather a mechanism for returning premiums to the relevant parties. The Phoenix Insurance estimates that the total amount of the payments is not expected to be material. The validity of the settlement is contingent on receiving the approval of the court.

G. On January 3, 2008, a statement of claim and motion for a certification as a class action were filed with the District Court in Tel Aviv against The Phoenix Insurance and other insurance companies, arguing that the management fees collected from the policyholder in profit-sharing life assurance are illegally collected. The lawsuit was filed by four plaintiffs and on behalf of every person who is or was insured by one or more of the defendant insurance companies, under a combined profit-sharing life assurance policy type, issued between 1992 and 2003 (inclusive) (“the Group”). The plaintiffs argue that the defendant insurance companies collected management fees in profit-sharing life assurance policies contrary to the instructions of Regulation 6A to the Insurance Businesses Supervision Regulations (Terms in Insurance Contracts), 5741-1981 (“The Supervision Regulations and contrary to the instructions of the Insurance Supervisor). As argued, the defendant insurance companies acted illegally in two aspects (or at least in one of them):They collected regular monthly management fees exceeding 0.05%.until 2004 (inclusive), apart from 2002; they collected the variable fees monthly instead of at the end of the year, thus allegedly depriving the policyholders of the proceeds for the variable management fees, collected throughout the year. The lawsuit against Phoenix Insurance refers to the second argument only.

C-156 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 33 – CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS (CONTD.)

A. Contingent liabilities (contd.)

26. Motions for certification as class action suits against The Phoenix (contd.)

G. (contd.) The personal damage incurred, as argued by one of the plaintiffs who was insured by The Phoenix Insurance in respect of each insurance year, amounts to NIS 13.22, and the total personal damage of all plaintiffs (each one in respect of each insurance year) allegedly amounts to NIS 32.21. The total damage incurred as argued by the entire group was estimated by the plaintiffs at a nominal amount of about NIS 244 million of which the plaintiffs attribute NIS 40 million to The Phoenix Insurance. The plaintiffs request the court to order the reimbursement of the excess management fees that were allegedly collected unlawfully, or the reimbursement of the monthly proceeds allegedly lost by each member of the group.. The plaintiffs also move for a mandatory injunction that will instruct the plaintiffs to change their mode of operation. The grounds argued in the lawsuit are as follows: (a) misleading and false presentation; (b) breach of the provisions of the Supervision on Financial Services (Insurance) Law – 1981, the supervision regulations and the circulars of the Insurance Supervisor; (c) lack of good faith; (d) unjust enrichment. The plaintiffs have agreed to postpone the date for filing the response of The Phoenix Insurance to the motion for certification of the claim as a class action to March 2010 The hearing for the motion for certification as a class action suit was set for July 7, 2010 at the Tel Aviv District Court

H. On January 3, 2008, a claim was filed with the Tel Aviv District Court (“the claim”), against The Phoenix Insurance and other insurance companies. The nature of the lawsuit – the lawsuit deals with a payment term “sub-annual”, a payment that is collected in life insurance policies in which the premium is set as an annual amount, but the payment is made in several installments (sub-annual). The plaintiff argues that Phoenix Insurance collected sub-annual payment at an amount exceed the allowed rate, and it does this in several ways, as argued by the plaintiff: collecting sub-annual payments relative to the management fees, collection of sub-annual payment at a rate exceeding the allowed rate in accordance with the insurance control circulars, collection of sub-annual payment relative to the savings element in life insurance policies and collection of sub-annual payment relative to policies that do not refer to life insurance. Accordingly, the plaintiff argues that in its action Phoenix Insurance breached the Control of Financial Services (Insurance) Law, 5741-1981 and its regulations, breached insurance control circulars, misled its policyholders, abused its position as a monopoly in the insurance market, illegally enriched itself, acted in mala fide, b reached the policy instructions and entered depriving terms in a policy that constitutes a uniform contract. The requested remedies are refunding of all amounts that the defendant insurance companies illegally collected, as well as a mandatory injunction that instructs the defendant insurance companies to change their mode of operation in respect of the matters specified in the lawsuit. Should the lawsuit be granted as a class action, the claimed amount from all the defendant insurance companies is estimated by the plaintiffs as around NIS 2.3 billion; of which the amount claimed from Phoenix Insurance amounts to about NIS 385 million. Phoenix Insurance has not yet responded to the motion. On February 1, 2010, the court approved a settlement to strike out the claim and motion that The Phoenix collected sub-annual rates exceeding the rate set on the Supervisor’s circulars for policies that were issued prior to 1992, and ordered the plaintiff to file an amended claim and motion, accordingly. A preliminary hearing has been set for September 5, 2010.

C-157 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 33 – CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS (CONTD.)

A. Contingent liabilities (contd.)

26. Motions for certification as class action suits against The Phoenix (contd.)

I. On July 30, 2008, a claim and motion for certification as a class action was filed against The Phoenix Insurance at the Tel Aviv-Jaffa District Court, under the Class Actions Law, 5766-2006 (“the claim”). The claim refers to the allegation that The Phoenix Insurance does not compensate its policyholders for protective measures installed in cars in cases of total loss. The plaintiff estimates the specific damage at NIS 500 and the damage for the group as NIS 27.8 million. At this stage, a ruling is pending.

J. On August 27, 2008, a claim and motion for certification as a class action was filed against The Phoenix Insurance at the Tel Aviv-Jaffa District Court. The plaintiff contends that The Phoenix Insurance does not pay the VAT component paid as part of compensation in motor insurance (property) and motor insurance (third party). Part of the VAT component paid for the cost of vehicle repairs, impairment of the car and the cost of preparation of an assessors report, covered by the plaintiff. Therefore, the plaintiff contends that The Phoenix Insurance paid him deficient insurance compensation, in contravention of the law, as by law, the owners of a commercial car are unable to fully deduct the VAT component/ The plaintiff further contends that The Phoenix Insurance does not include the VAT component in the calculation of impairment of the vehicle, even though according to the VAT Regulations – 1976, commencing from July 2005, a business may not deduct the VAT component for purchase or import of a private car, even if the car is not new, or is used only for business purposes. Accordingly, the plaintiff contends that the grounds for the claim is the breach of statutory duty including contravention of certain sections of the Insurance Contract Law, 5741-1981 and unjust enrichment law. The remedy requested by the applicant is a change for the proportionate share of VAT for which tax cannot be credited. The amount claimed by the plaintiff personally amounts to NIS 1,663, as of the filing date of the claim. If the case is certified as a class action suit, the plaintiff estimates the amount of the suit at NIS 44.7 million. The Phoenix Insurance has responded to the motion. On October 21, 2009, the court ruled to transfer motion and claim, pursuant to section 7 of the Class Actions Law, 5756-2006, to the judge that heard the claim (and the motion for certification as a class action), which was filed against other insurance companies in a similar matter to that of the claim. A preliminary hearing of the motion has been set for May 10, 2010.

K. On December 16, 2008, a claim and motion for certification as a class action were filed against Excellence and its subsidiary. The amount of the class action is estimated at tens of millions of shekels. In brief, the plaintiff contends that compound certifications (Series 17) did not follow the Yeter 50 index, contrary to the investment strategy of the certificate and did not maintain fair value during trading on the TASE, and that the subsidiary of Excellence performed forced conversion of the certificates, in contravention of the provisions of the prospectus. In the court hearing, the parties agreed to try and reach a settlement. After the parties failed to reach an agreement, on January 12, 2010, the plaintiff filed another motion to expand the outline proposed by the court. On February 1, 2010, the defendants submitted their response. The court ruling has yet to be handed down. A pretrial hearing for certification of the claim as a class action is set for April 27, 2010.

C-158 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 33 – CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS (CONTD.)

A. Contingent liabilities (contd.)

26. Motions for certification as class action suits against The Phoenix (contd.)

L. On March 10, 2009, a claim and motion for certification as a class action was filed against The Phoenix Insurance at the Tel Aviv-Jaffa District Court, under the Class Actions Law 5756-2006 (“the claim”). The class action refers to organ insurance, which is part of health insurance (“transplant insurance”). The plaintiffs contend that under the Transplant Law, the insurance event became impossible in respect of the transplant component, and in any case, the premium for this risk is allegedly collected in contravention of the law. Alternately, it was alleged that there was significant reduction in the risk of a policyholder in insurance events, in a way that requires significant reduction in insurance fees today. In the class action against The Phoenix, the amount of the claim amounted to NIS 209 for each policyholder insured for transplants by The Phoenix, and the plaintiff estimates that hundred of thousands of people are involved. The response to the motion was filed on September 2, 2009 and the response of the plaintiff was filed on February 14, 2010. The statement of defense in the class action will only be filed if the application is approved. In addition, on January 10, 2010, an application was filed for review and copying of specific documents (“the request to review”). The Phoenix filed its response to the request to review on February 8, 2010. The response to The Phoenix’s response to the request to review was filed on February 25, 2010. The pretrial hearing for preliminary debate of the request has yet to be set. At the same time, the parties filed statements of claims in respect of joining the claim with other claims on the same matter, which were filed against other insurance companies and against health funds. The Phoenix agrees to combine the hearing for all the claims filed against the insurance companies, and objects to combining the hearing with the claims filed against the health funds.

M. On April 25, 2009, a motion for certification as a class action was filed against Standard and Poor's Maalot Ltd. (“Maalot”), World Currencies Ltd. (a subsidiary, hereinafter “World Currencies”) and officers in the Excellence Group, Bank Leumi Le Israel Trust Company Ltd. and against Excellence, in respect of the prospectus filed by World Currencies for the public placement of debentures backed by notes issued by Lehman Brothers Bankhaus AG (“Lehman Germany”). The plaintiff claims that Excellence, World Currencies and officers in the Excellence Group breached various obligations towards the debenture holders, including by not informing them of Lehman’s link to the debentures and Excellence’s dependence and ability to repay from the notes issued by Lehman, in a way that investors relied only on the rating of the debentures by Maalot. It is further claimed that Excellence did not report that the collapse of Lehman Germany could possibly affect the repayment of the debentures and reduce the value of the debentures, that the Excellence failed to inform the investors in real time of the implications of the economic crisis on the full and timely repayment of the debentures and that Excellence was negligent when including the opinion of Maalot in the prospectus. The plaintiff is one of the debenture holders and he asks to file the claim in his name and on behalf of all the debenture holders at the date Leman collapsed. The plaintiff estimates that the class action amounts to NIS 84.5.

N. On May 27, 2009, a motion for certification as a class action was filed against Keshet Debentures Ltd. (a special purpose company of Excellence, hereinafter “Keshet”) and its directors, Expert Finances Ltd. (which to the best of Excellence’s knowledge holds 50% of the issued share capital of Keshet), Excellence Nessuah Underwriting (1993) Ltd. (a subsidiary of Excellence, hereinafter “Excellence Underwriting”), which holds the other 50% of the issued share capital of Keshet and against Excellence (hereinafter jointly: "the defendants"), in respect of the prospectus filed by Keshet for the public placement of debentures backed by notes issued by Lehman Brothers Bankhaus AG (“Lehman Germany”). The liability of Lehman Germany was guaranteed by Lehman Brothers Holdings Inc. (Lehman USA). Lehman Germany and Leman USA will be referred to hereunder as “the Lehman Group”.

C-159 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 33 – CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS (CONTD.)

A. Contingent liabilities (contd.)

26. Motions for certification as class action suits against The Phoenix (contd.)

N. (contd.) The plaintiff claims that the defendants breached various obligations towards the debenture holders, including by allegedly disregarding several material events relating to the main risk for repayment of the notes, and which indicated the financial deterioration of the Lehman Group. The plaintiff claims that the defendants should have informed the investors of the negative developments in the Lehman Group, and that the numerous dramatic events allegedly issued about the Lehman Group was not met by any response or disclosure by the defendants. The alleged failure to disclose and the false representations misled the investors in the debentures and was the cause of the damage to the members of the group in the claim. The plaintiff contends that the behavior of the defendants was faulty and that the defendants could have prevented the damage or substantially reduced it and did not do so. The plaintiff further contends that in March 2008, the defendants who are the controlling shareholders in Excellence, changed the service agreement with Keshet, such that the defendants were able to withdraw all the funds from Keshet, that the funds that were withdrawn from Keshet could have been used to purchase deposits insurance, that the defendants did not take steps to insure deposits in respect of the funds invested in Lehman Germany, even though, allegedly, the fiduciary duty and duty of care towards the investors requires insuring such deposits, and that the defendants did not take steps to replace the backing bank. The plaintiff is one of the debenture holders and he asks to file the claim in his name and on behalf of all the debenture holders at the date Leman collapsed. The plaintiff estimates that the class action amounts to NIS 286. Following the request of the defendants, the claim was combined with the claim set out in section O below and the amount of the claim was adjusted to NIS 286 million.

O. On July 23, 2009, a motion for certification as a class action was filed against Maalot, Bank Leumi Le Israel Trust Company Ltd. and against Keshet, Excellence Underwriting and officers in Excellence and Expert Finances Ltd. (“the defendants”), in respect of the prospectus filed by Keshet for the public placement of debentures backed by notes issued by Lehman Germany. The plaintiff contends that various duties towards the debenture holders were breached, inter alia, by the failure of Keshet to report that the collapse of Lehman could possibly affect the repayment of the debentures and reduce the value of the debentures and that Keshet failed to inform the investors in real time of the implications of the economic crisis on the full and timely repayment of the debentures. The plaintiff further contends that the defendants should have informed the investors of the negative developments regarding Lehman, and that the dramatic events that were published about the Lehman Group did not receive any response or disclosure from the defendants. It was alleged that the failure to disclose and the false representations misled the investors in the debentures and was the cause of the damage to the members of the group in the claim. The plaintiff contends that the behavior of the defendants was faulty and that the defendants could have prevented the damage or substantially reduced it and did not do so. The plaintiff further contends that in March 2008, the defendants who are the controlling shareholders in Excellence, changed the service agreement with Keshet, such that the defendants were able to withdraw all the funds from Keshet, that the funds that were withdrawn from Keshet could have been used to purchase deposits insurance, that the defendants did not take steps to insure deposits in respect of the funds invested in Lehman Germany, even though, allegedly, the fiduciary duty and duty of care towards the investors requires insuring such deposits, and that the defendants did not take steps to replace the backing bank. The plaintiff is one of the debenture holders and he asks to file the claim in his name and on behalf of all the debenture holders at the date Leman collapsed. The plaintiff estimates that the class action amounts to NIS 220. Following the request of the defendants, the claim was combined with the claim set out in section N below and the amount of the claim was adjusted to NIS 286 million.

C-160 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 33 – CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS (CONTD.)

A. Contingent liabilities (contd.)

26. Motions for certification as class action suits against The Phoenix (contd.)

P. On August 31, 2009, a motion for certification as a class action in the amount of NIS 82 million was filed in the Tel Aviv District Court against Excellence Nessuah Provident Fund Ltd. (Excellence Provident”)

The plaintiff (a member of a provident fund managed by Excellence Provident) contends that Excellence Provident was negligent and/or acted in bad faith when it set the investment in shares at more than 50% in five share-based provident funds that it manages. The plaintiff further contends that the choice of the shares in which the provident funds invested was negligent. The plaintiff further claims that management fees should not have been collected from members of the funds that year.

Q. On September 9, 2009, a claim was filed against Phoenix Israel Insurance Company Ltd. and against Excellence Provident, together with a motion for certification as a class action suit. The claim was filed against 11 provident fund management companies or insurance companies (“the defendants”) by six policyholders and/or members of the defendants, in whose name management funds are registered by the defendants in provident or insurance funds (“the plaintiffs”). The Phoenix filed its response on February 11, 2010. The statement of defense, if required, will be filed 30 days after certification of the claim as a class action (if at all). The pretrial hearing of the case was set for March 14, 2010. The plaintiffs contend that the defendants deducted the effective cost for investment of their funds in exchange traded funds from the funds registered at the plaintiffs in the name of each of the individuals in the group of plaintiffs,. The plaintiffs are petitioning the court, inter alia, to order the defendants to return the total effective costs that were deducted from the pension funds, in contravention of the law, as defined in the petition (from November 10, 2005 through to the date of the petition) and to declare that the defendants are not permitted to deduct the effective cost for their investment in the exchange traded funds from the funds registered with the defendants in the name of each of the individuals in the group of plaintiffs. The amount claimed from The Phoenix Insurance and Excellence Provident is NIS 13.8 million and NIS 15 million, respectively.

R. A policyholder of a pension fund in The Phoenix Comprehensive Pension filed a claim at the Tel Aviv District Court against the management company (The Phoenix Pension, a subsidiary of The Phoenix). The plaintiff contends that the defendant, as the management company, invested a substantial amount of the funds of the policyholders and members in structured and high-risk financial instrument abroad (such as CDO and CLD), without understanding the nature of these instruments and mainly without being aware of the risks involved in the investment. In accordance with the claim, the plaintiff contends that the defendant should compensate its members and policyholders, for loss incurred in the scope of tens of millions of shekels, without stating a precise amount in the claim. Together with the claim, a motion for certification as a class action was filed under the Class Actions Law 5756-2006 At this stage, The Phoenix is studying the details of the claim, therefore it is not possible to estimate the likelihood of its certification as a class action, and if it is approved as a class action, it is not possible to estimate the likelihood of its success.

C-161 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 33 – CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS (CONTD.)

A. Contingent liabilities (contd.)

26. Motions for certification as class action suits against The Phoenix (contd.)

S. On February 24, 2010, a claim and motion for certification as a class action was filed against The Phoenix Insurance at the Central District Court in Petach Tikva, under the Class Actions Law 5756-2006 (“the claim”). The plaintiff contends that the defendant is not entitled to collect from the policyholders in profit-generating policies any amount for “other management fees and/or policy factor” without any agreement between the party and without regulatory permission(unlike fixed and variable management fees that the defendant is entitled to charge). The plaintiff filed the claim in his name and on behalf of any person who is or was insured by the defendant and who was charged any amount as “other management fees and/or policy factor" (“the Group”). The personal damaged claimed by the plaintiff is NIS 428.45 (for 2006 and 2007 only, even though the alleged grounds for the claim is for 2003 to 2009). The plaintiff estimates that the general damage caused to the entire group is NIS 445 million. The grounds argued in the claim are as follows: misleading representation, breach of the Control of Financial Services (Insurance) Law, 5741-1981, lack of good faith and unjust enrichment. At this stage, The Phoenix Insurance is studying the details of the claim, therefore it is not possible to estimate the likelihood of its certification as a class action, and if it is approved as a class action, it is not possible to estimate the likelihood of its success.

T. On March 3, 2010, a claim and motion for certification as a class action were filed at the Central District Court in Petach Tikva against Excellence Nessuah Provident and Pension Ltd. (“Excellence Provident”) which is wholly-owned and controlled by Excellence, and against two management companies of other provident funds, Technical and Engineers Professional Study Fund Ltd. and Clal Provident Ltd., pursuant to the Class Actions Law (5766-2006). The plaintiffs claim that Excellence Provident and the other dependants charged the members of certain provident funds managed by Excellence Provident, for collective life assurance, without their explicit written consent, and charged the members a premium. The plaintiffs contend that the defendants allegedly breached the provisions of various laws, including the provisions of the Control of Insurance Business (Collective Life Assurance) Regulations, 5753-1993, the Control of Financial Services Law (Provident Funds), 5765-2005, and the regulations in the articles of the funds. The claim was filed by a number of plaintiffs in whose name funds are registered in various funds managed by the defendants set out in the statement of claim. The group that the plaintiffs claim to represent is made up of anyone who was a member in any of the provident funds managed by any of the defendants included in the claim and/or other provident funds, from which collective life assurance premiums are or were collected, without receiving written consent. In the statement of claim, the plaintiffs stated that at this stage, they are not requesting reimbursement of the moneys that were allegedly collected without the plaintiffs' consent. The plaintiffs are asking for the following remedies from the court: (a) declarative relief according to which the defendants undertake not to insure members for life assurance without their written consent; (b) a mandatory injunction according to which the defendants will be required to apply to all the relevant members and receive their written consent for life assurance and collection of a premium.

27. A number of claims have been filed against the companies in the Group, deriving from the course of regular business. The Group’s management estimates that, based on the assessment of the management of the companies, the provisions that were made for these claims, beyond the existing insurance coverage, are sufficient.

C-162 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 33 – CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS (CONTD.)

B. Guarantees

At December 31, 2009, the following guarantees are in place:

NIS millions

Guarantees for affiliates (1) (2) (3) 240 Guarantees for others (4) (5) 61

301

(1) Including guarantees of NIS 60 million in favor of Delek Real Estate. See also Note 14(G)(1).

(2) Including guarantees of NIS 127 million in favor of IDE for construction and operation of desalination plants

(3) Including guarantees of NIS 54 million provided by DES in favor of an affiliate. DES included a provision of NIS 34 million (after offsetting collateral) for this guarantee.

(4) Including guarantees of NIS 28 million, provided in respect of a hedging transaction on gas prices.

(5) Including guarantees in favor of the CEO of Delek Automotive for bank loans that he received to acquire Delek Automotive shares. At December 31, 2009, the balance of the loans is NIS 30 million.

(4) The Company is the guarantor for the liabilities of subsidiaries towards banks and third parties. The liabilities for the guarantees amounted to NIS 0.9 billion at December 31, 2009 (including NIS 834 million for wholly-owned companies).

C. Agreements

1. At December 31, 2009, Delek Petroleum has the following agreements with third parties, for the rent and lease of stations, facilities and buildings:

NIS millions

First year 367

Second year through the fifth year 1,033 More than five years 1,477

2,877

In addition, Delek Petroleum and its subsidiaries have entered into agreements for the purchase of fuel products (delivery in January-December 2010) amounting to NIS 2.761 billion. A subsidiary in the United States has agreements with suppliers for purchasing fuels for defined periods that include commitments to purchase minimum amounts and a fine is incurred for non- compliance with these amounts.

2. See Note 16 for agreements in respect of investments in oil and gas exploration.

3. Phoenix Insurance has obligations for future investments in venture capital and investment funds amounting to NIS 1.1 billion at December 31, 2009, of which NIS 1 billion is for performance-based contracts (at December 31, 2008, NIS 1 billion, of which NIS 0.9 billion is for performance-based contracts).

C-163 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 33 – CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS (CONTD.)

C. Agreements (contd.)

4. In the framework of the agreements of a subsidiary with vehicle suppliers, a number of terms were defined, including an undertaking to purchase a minimum quantity of vehicles and the requirement to receive the approval of the suppliers for changes in the management of the subsidiary. At December 31, 2009, the subsidiary was in compliance with its undertakings towards the suppliers.

D. Indemnification and insurance of officers

1. The Group has undertaken to indemnify all entitled officers of the Group for any action taken in virtue of their service as officers in the Group in the past, present and future. The Group has undertaken to indemnify all entitled officers of the Group for any action taken in virtue of their service as officers in the Group in the past, present and future.

2. The Group has decided to exempt officers of the Group from their liability under the duty of care toward the Group pursuant to chapter three, part six of the Companies Law – 1999.

3. The Company has insured the liability of the officers for the total liability limit of $75 million.

NOTE 34 – LIENS

A. To secure loans from banks and other institutes, amounting to NIS 8 billion at December 31, 2009, collateral was provided as follows:

− The Company and its subsidiaries recorded fixed and floating liens on their non-current and current assets, including on inventories, specific deposits, the right to trade receivables, certain oil and gas assets, the right to receive royalties, specific liens on certain shares of investees and participating units and mortgages on all the companies’ rights in properties in respect to which credit was granted.

− Subsidiaries have undertaken to meet certain conditions, including to refrain from recording lien in favor of others without the prior agreement of the lending corporations

− See Note 24(C) for undertakings to meet financial covenants.

B. See Note 16 for liens in respect of investments in oil and gas assets.

NOTE 35 – EQUITY

A. Composition:

December 31, 2009 December 31, 2008 Issued and Issued and Registered paid up Registered paid up Number of shares

Ordinary shares of par value NIS 1 each 15,000,000 11,690,253 15,000,000 11,686,363

The shares are listed on the TASE.

C-164 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 35 – EQUITY (CONTD.)

B. In January 2009 the Company acquired 5,504 of its shares on the TASE for NIS 0.75 million. In addition, in July 2009, the Company acquired an additional 5,459 shares for NIS 2 million. Subsequent to the acquisition, the number of dormant shares amounted to 346,407 ordinary shares. In addition, Delek Investments acquired 22,462 Company shares for NIS 10 million.

C. In May 2009, NIS 1,120,169 par value debentures of the Group were converted into 3,890 Group shares.

D. In 2009, the special purpose companies issuing ETFs acquired Group shares in a net amount of NIS 20 million. In 2009, the Group’s special purpose companies sold Group shares for a net consideration of NIS 31 million.

E. In March 2005, the Company issued (in a private placement of debentures) 400,000 warrants (five series of 80,000 warrants each). Each warrant is exercisable into one ordinary share, par value NIS 1 of the Company. The debentures were allotted at their full price and the warrants were issued for no consideration. At December 31, 2009, some of Series 5 options remained in circulation.

F. In September 2009, the Company issued 260,000 warrants, Series 6. See Note 28(B)(6).

G. Unexercised option warrants at the reporting date:

Balance of option Exercise supplement warrants December 31, 2009 Option warrants December 31, 2009 (NIS) Exercisable

Series 5 *) 33,560 501.7044 Up to March 2010 Series 6 260,000 **) Up to September 2013

293,560

*) The exercise price is linked to the CPI and is subject to adjustments The fair value of the options as at December 31, 2009 is NIS 9 million. The options are presented under long-term liabilities. **) The exercise addition is unlinked and subject to adjustments. Up to September 9, 2001, the exercise addition is NIS 871.9975 per share and from that date up to September 9, 2013, NIS 930.7839 per share.

H. Subsequent to the reporting date, in February-March 2010, 33,416 Series 5 option warrants were exercised into 33,416 ordinary shares of the Company. The additional exercise price amounted to NIS 16.3 million. The balance of Series 5 options expired in March 2010

I. Cost of share-based payment

In June 2009, the board of directors of the Company approved a phantom options plan for senior managers and office holders. The options will be granted at no cost and will be exercisable into a cash grant equal to the difference between the increase in the market price of the Company’s shares at the exercise date and the exercise price. The exercise price was set at NIS 503.2 per share, unlinked and will be subject to certain adjustments as stipulated in the allocation agreement.

According to the plan, the options will vest in three equal annual lots. The first lot will vest one year after the approval date of the allotment (June 2009). The options will expire two years after the end of the vesting period. A total of 46,895 options were allocated under the plan. According to an appraisal received by the Company, the financial value of the options at the allocation date is NIS 11.2 million.

C-165 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 35 – EQUITY (CONTD.)

I. Cost of share-based payment (contd.)

Out of the total amount of the options, the audit committee and the board of directors resolved to allocate 20,000 phantom options (0.17% of the fully diluted capital did not relate to options for the acquisition of the Company’s shares), under the plan, to the CEO of the Company. According to an appraisal received by the Company, the financial value of the phantom options granted to the CEO under the plan at the allocation date is NIS 4.78 million.

Calculation of the financial value was based on the binomial model for pricing the options and based on the following assumptions:

Share price (NIS) 500 Exercise price of each option (NIS) 503.2 Standard deviation (%) 52.1 Capitalization rate (%) 4.7 Expected life (years) 5

At December 31, 2009, the financial value of the options amounted to NIS 15 million and in 2009, an expense of NIS 5 million was recognized for the plan. .

J. Dividends

1. In May 2009, the Group declared the distribution of a dividend to its shareholders in the amount of NIS 72 million (NIS 6.3 per share). The dividend was paid in July 2009.

2. In August 2009, the Company declared the distribution of a dividend to its shareholders in the amount of NIS 105 million (NIS 9.25 per share). The dividend was paid in September 2009.

3. On November 29, 2009, the Group declared a distribution of a dividend to its shareholders in the amount of NIS 33 million. The dividend was paid in January 2010.

4. On December 28, 2009, the Group declared a distribution of a dividend to its shareholders in the amount of NIS 150 million. The dividend was paid in January 2010.

5. See Note 14(G) for declaration of distribution of Delek Real Estate shares as a dividend in kind.

6. Subsequent to the reporting date, on March 24, 2010, the Group declared the distribution of a dividend to its shareholders in the amount of NIS100 million.

C-166 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 36 – MINIMUM EQUITY REQUIRED OF AN INSURER

1. The information below regarding the required and existing equity of The Phoenix Insurance is in accordance with Control of Financial Services Regulations (Insurance) (Minimal Equity Required of an Insurer) (Amendment), 5758-1998 (the equity regulations) and the guidelines of the Supervisor.

December 31 2009 2008 NIS millions Minimum equity: Amount required under the equity regulations and Supervisor’s guidelines (a) 2,133 Amount calculated according to the equity regulations immediately before publication of the amendment 1,392

Difference 741

Amount required at the reporting date under the equity regulations and Supervisor’s guidelines (a) 1,614 1,413

Actual amount calculated in accordance with the equity regulations Primary capital 1,488 920 Secondary capital (subordinated notes)/capital notes 788 497

Total actual amount calculated in accordance with the equity regulations 2,276 1,417

Excess 662 4

Apart from the general requirements in the Companies Law, distribution of a dividend from surplus capital in equity of insurance companies is also subject to liquidity requirements and compliance with the investment regulations. In this matter, the amount of the investment in investees, against which it is mandatory to place excess capital under the Supervisor’s guidelines, thereby constituting non-distributable excess 309 259

Investments deficit against excess capital (10) (255)

(a) The required amount includes capital requirements for: General insurance/initial capital 393 375 Long-term care insurance 43 41 Exceptional life assurance risks in life assurance 192 184 Deferred acquisition costs in life assurance and health insurance 659 704 Requirements for guaranteed yield plans 2 2 Unrecognized assets as defined in the Capital Regulations 95 94 Investments in consolidated insurance companies and management companies 8 13 Investment and other assets 513 - Catastrophe risks in general insurance 72 - Operating risks 156 -

Total amount required under the amended Capital Regulations 2,133 1,413

C-167 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 36 – MINIMUM EQUITY REQUIRED OF AN INSURER (CONTD.)

2. (contd.) (b) Under the amendment, by the publication date of the financial statements, an insurer is required to increase its equity for the difference between the capital required pursuant to the regulations, before and after the amendment (“the difference”). The difference will be calculated at each reporting date. The equity will be increased at the dates and rates set out below:

Up to the publication date of the financial statements as at December 31, 2009, at least 30% of the difference Up to the publication date of the financial statements as at December 31, 2010, at least 60% of the difference Up to December 31, 2011, the entire difference will be paid.

These rates will be increased by 15% at the publication dates of the six-month financial statements subsequent to the abovementioned dates of the financial statements.

3. In June 2008, a circular was published relating to application of IFRS presentation guidelines and criteria for calculating the required and recognized equity of insurance companies, commencing from the financial statements of the second quarter of 2008. The objective of the circular is to set out guidelines for application of equity standards regarding investments in investees (including insurance companies and management companies controlled by insurance companies). According to the circular, the required equity in accordance with the capital regulations will continue to be based on stand-alone financial statements. To calculate the recognized equity in accordance with the capital regulations, the investment by an insurance company in an insurance company or a controlled management company and in other investees shall be calculated on the on the basis of the rate of the holdings linked to them. For equity included in the Company’s separate financial statements, under the provisions of the circular, see the appendix to these financial statements.

4. In November 2009, an amendment was published for the Financial Services Control Regulations (Minimum Equity Required from an Insurer) (Amendment) 5769-2009 (“the amendment”). The amendment includes, in addition to the existing capital requirements, capital requirements for the following categories:

A. Operational risks B. Market and credit risks, as a percentage of the assets, based on the extent of the risk typical of the various assets. C. Catastrophe risks in general insurance D. Capital requirements for guarantees

In addition, capital requirements were expanded for the following categories:

A. Plans guaranteeing life insurance yields against which or against some of which there are no earmarked debentures. B. Capital requirements for the insurer’s holding in management companies of provident funds and pension funds.

In addition, the exemptions were granted for the following instances:

− Calculation of capital for information system development expenses, subject to the Supervisor’s approval

− Deduction of the reserve for tax created for unrecognized assets held contrary to the investment regulations or contrary to the Supervisor’s instructions

− It was determined that the Supervisor may allow, subject to terms that he defines, a reduction of the capital requirements of 35% of the original difference, for acquisition of provident fund operations or a provident fund management company, for an insurer whose equity deficit is due to a capital requirement in this amount only

C-168 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 36 – MINIMUM EQUITY REQUIRED OF AN INSURER (CONTD.)

4. (contd.)

B. (contd.) In the amendment, the definition of basic capital was deleted, definitions of primary and secondary capital were changed and a definition for tertiary capital was added. The definitions of secondary and tertiary capital are subject to the conditions and rates determined by the Supervisor. Furthermore, and according to the Supervisor’s intention to implement Solvency II, the EU directive for regulating the solvency of insurers, in March 2010, a second draft circular was published for institutions – Composition of an Insurer’s Recognized Equity (“the second draft”). The second draft provides provisions for the structure of an insurer’s recognized capital, and principles for recognizing capital components and classifying them into the different capital levels.

The second draft includes a temporary order for the structure of an insurer’s equity from April 1, 2010 through to a date announced by the Supervisor according to which the provisions of the second draft gradually comes into effect.

5. In June 2009, a draft amendment was published to the Supervision of Financial Services Regulations (Provident Funds) (Minimum Equity Required from a Management Company), 5769- 2009 and the second draft of a circular for institutions regarding capital requirements from management companies (“the regulations”).

Pursuant to the regulations, it is recommended to expand the capital requirements from management companies. The new capital requirements will include capital requirements in accordance with the scope of the managed assets, but no less than the primary equity of NIS 10 million. In addition, deferred acquisition expenses and assets held contrary to the investment regulations will not be held against the minimum equity.

Pursuant to the regulations, on the publication date of the regulations, a management company with equity that is lower than the equity required under the regulations, will be required to increase its equity to at least one half of the required amount by March 31, 2010, and the balance of the amount by December 31, 2010. Following the transfer of The Phoenix Provident Funds Ltd. ("The Phoenix Provident") to The Phoenix Pension in 2010, The Phoenix Provident will no longer be a management company as defined in the Provident Funds Law, and therefore these provisions will not apply to it and it will not be required to increase its equity. The Company estimates that if it adopts the requirements in their current format, the Company’s equity requirements for these provisions will increase by NIS 32 million.

6. In accordance with the Supervisor’s circular of March 29, 2009, as from the financial statements for 2008 and until December 30, 2010, an insurance company and a management company require the consent of the Supervisor before distributing a dividend. Pursuant to the circular, in general, the amount of the dividend shall not exceed 25% of the profit permitted for distribution. Following the circular, in March 2010 a clarification was issued in respect of criteria for approval of the distribution of a dividend by an insurer (“the clarification”).

In accordance with the clarification, an insurance company may apply for the Supervisor's approval to distribute a dividend, as from the publication date of the periodic reports for 2009, subject to equity as set out in the clarification and the submission of an annual profit forecast for 2010-2011, an updated debt service plan approved by the board of directors of the holdings company, an operative plan to raise capital approved by the board of directors of the insurance company and the minutes of the meetings of the board of directors of the insurance company in which distribution of the dividend was approved.

At the same time, the clarification prescribed that a company with equity, subsequent to distribution of the dividend, that is 110% higher than the amount required in the clarification, may distribute a dividend without the prior approval of the Supervisor, provided the Supervisor was notified of such and the relevant documents were submitted to the Supervisor prior to distribution of the dividend.

C-169 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 36 – MINIMUM EQUITY REQUIRED OF AN INSURER (CONTD.)

7. On July 10, 2007, the EU adopted a proposed draft to the Solvency II Directive (“the proposed directive”). The proposed directive constitutes fundamental and comprehensive change of the regulations relating to ensuring solvency and capital adequacy of insurance companies in EU countries. In accordance with the schedules determined by the EU, the proposed directive is expected to by applied in EU countries in the second half of 2012.

Pursuant to the circular published by the Supervisor, the intention is to implement the provisions of the proposed directive for insurance companies in Israel at the same date of application in EU companies. The proposed directive is based on three levels: quantitative, qualitative and disclosure requirements. The Company has started to prepare for application of the proposed directive within the timetable that was defined.

8. The Phoenix Insurance undertook to complement, at any time, the shareholders’ equity of The Phoenix Pension and Benefit Fund Management Ltd. (“the Pension”) to the amount determined in the Income Tax Regulations (Regulations for Approval and Management of Provident Funds) 5724- 1964. The undertaking will be valid as long as The Phoenix controls Pension, directly or indirectly.

9. On January 25, 2009, the Supervisor published a circular regarding relief for the capital required from insurance companies in respect of the rate of secondary capital and passive deviation, as follows:

a) For any increase in primary capital created as a result of investment in the insurance company by its controlling shareholders, commencing from December 1, 2008 until June 30, 2009 (“the increase”), the insurance company may include in its recognized capital, secondary capital amounting to 75% of the total increase, instead of 50% as determined in the capital regulations, up to a limit of 60% of the total primary capital. Increase of the secondary amount as stated in section above will be decreased in a straight line commencing from June 30, 2009 and up to June 30, 2010.

On March 11, 2009 and March 31, 2009, The Phoenix received approval to recognize, as part of its recognized equity, secondary capital of 75% for the injection of primary capital of NIS 350 million. At December 31, 2009, as part of the recognized equity, the Company recognized additional secondary capital of NIS 44 million, beyond the 50% limit.

b) An asset held in contravention of the investment regulations (an unrecognized asset) will not be considered as an unrecognized asset as defined in the capital regulations, provided the deviations from the restrictions and the conditions were created subsequent to October 1, 2008, and due to the change in the market value of the investment assets, a decrease in the total par value of a marketable security, a decrease in the rating of the security or the rating of a reinsurer, a change in the liabilities of the insurer or a change in the insurer’s equity or a deviation from the investment regulations for which specific approval was received, but in any case, not due to a new investment in an investment asset subject to the prior approval of the Supervisor.

The Phoenix Insurance received approval for the deviations from the investment regulations

On March 29, 2009, the Company invested NIS 200 million in return for issuing shares. On December 31, 2008, The Phoenix Insurance has secondary capital with a maturity date of more than two years, which is not recognized as capital due to limitations of primary capital. As a result of the increase of the primary capital, The Phoenix Insurance may recognize the secondary capital as minimal equity.

10. In accordance with the US National Association of Insurance Commissioners (NAIC), Republic requires minimum equity of $48 million. At December 31, 2009, the capital of Republic amounted to $300 million.

11. In 2009, The Phoenix Insurance established The Phoenix Capital Raising (2009) Ltd., which issues debentures.

C-170 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 37 – COST OF REVENUE

Year ended December 31 2009 2008 2007 NIS millions

Purchase of oil, fuel and products 22,242 34,342 22,442 Purchase of vehicles and spare parts 4,192 3,781 3,887 Salary and incidentals 189 176 92 Depreciation, depletion and amortization 283 343 102 Other production expenses and costs 444 443 459 Transportation 96 97 15 Increase in residual insurance liabilities and payments for insurance contracts 9,347 1,209 5,792 Cost of electricity supplied 101 85 102 Oil and gas exploration expenses 121 160 91 Other 17 15 7

37,032 40,651 32,989

NOTE 38 – SELLING, MARKETING AND GAS STATION OPERATING EXPENSES

Year ended December 31 2009 2008 2007 NIS millions

Salary and incidentals 655 608 452 Maintenance of gas stations 734 672 449 Advertising and sales promotion 79 76 52 Depreciation and amortization 272 230 112 Commissions for agents 87 99 117 Commissions and acquisition expenses in insurance 1,338 companies 1,166 1,036 Other 261 306 173

3,426 3,157 2,391

NOTE 39 – GENERAL AND ADMINISTRATIVE EXPENSES

Year ended December 31 2009 2008 2007 NIS millions

Salary and incidentals 915 734 802 Depreciation and amortization 359 322 147 Doubtful and lost debts 5 16 (13) Office maintenance 136 90 86 Professional services 133 107 45 Other 220 207 -

1,768 1,476 1,067

C-171 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 40 – OTHER REVENUE (EXPENSES), NET

Year ended December 31 2009 2008 2007 NIS millions

Compensation from an insurance company 419 - - Provision for impairment of assets (83) - (10) Profit from sale of property, plant and equipment, net - 23 - Expenses for structural change (15) (81) - Profit from negative goodwill 15 53 - Other revenue, net (25) 45 (25)

311 40 (35)

NOTE 41 – A. FINANCE REVENUE

Year ended December 31 2009 2008 2007 NIS millions

Net change in fair value of financial assets recognized at fair value through profit or loss 166 - - Profit from disposal of available-for-sale securities 109 - - Interest-bearing loans from banks 44 91 95 Dividends from available-for-sale securities 17 24 76 Derivative financial instruments 34 85 10 Profit from premature payment and exchange of debentures 82 30 - Other 157 110 17

609 340 198

B. Finance expenses

Finance expenses for credit from banks and others 1,315 1,333 733 Impairment of available-for-sale securities 3 235 - Loss from negotiable securities, net - 117 5 Derivative financial instruments 48 16 66 Other finance expenses, net 83 97 264

1,449 1,798 1,068

C-172 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 42 – EXPENSES BY TYPE OF POLICY

Year ended 31 December, 2009:

Policy with risk factor (including appendixes) According to policy date Risk-free policy Total Risk sold as single From 2004 policy Non- performance Performan Up to 1990 Up to 2003 based ce-based Individual Collective NIS millions

Gross premiums:

Traditional/mixed 116 56 - 1 - - 173 Saving factor 64 931 - 819 - - 1,814 Other 26 245 - 78 214 98 661

Total 206 (2) 1,232 - 898 214 98 2,648

Proceeds for investment contracts recognized directly in insurance - - - 81 - - 81

Finance margin including management fees (3) 42 82 1 29 - - 154

Profit (loss) from life assurance operations 64 87 - (82) 20 8 97

Profit from pension and annuity 50

Total comprehensive profit from life assurance and long- term savings 147

Premium for insurance contract – new business - - - 238 33 - 271

One-time premium for insurance - 8 - 89 - - 97

Premium for investment – new business - - - 4 - - 4

1. The products issued until 1990 (including the growth in respect thereof) were designed mainly to guarantee yield, and they are hedged mainly by designated debentures. 2. The increase in existing policies is not included in the annualized premium for new business, but in the operational expenses of the original policy. 3. The financial margin does not include the company's further income collected as a percentage of the premium and it is calculated according to deduction of expenses for investment management. The financial margin in policies with guaranteed yield is based on the actual investment income during the reporting period net of the product of the guaranteed yield rate during the year, multiplied by the average reserve for the year in the various insurance funds. In the performance-based contracts, the financial margin is the total fixed and variable management fees calculated on the basis of the average yield and balance of the insurance reserves.

C-173 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 42 – EXPENSES BY TYPE OF POLICY

Year ended 31 December, 2008:

Gross premiums:

Traditional/mixed 122 63 - 1 - - 186 Saving factor 62 986 - 750 - - 1,798 Other 27 262 - 73 201 90 653

Total 211 (2) 1,311 - 824 201 90 2,637

Proceeds for investment contracts recognized directly in insurance reserves - - 2 80 - - 82

Finance margin including management fees (3) (22) 62 1 26 - - 67

Profit from life assurance operations - (137) 1 (53) 31 10 (148)

Profit from pension and annuity 4

Total comprehensive profit (loss) from life assurance and long- term savings (144)

Premium for Insurance contract – new business - - - 284 31 - 315

One-time premium for Insurance - 16 - 58 - - 74

Premium for investment – new business - - - 5 - - 5

C-174 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 42 – EXPENSES BY TYPE OF POLICY

Year ended 31 December, 2007:

Traditional/mixed 126 70 - - - - 196 Saving factor 56 997 - 562 - - 1,615 Other 31 285 - 57 164 93 630

Total 213 (2) 1,352 - 619 164 93 2,441

Premiums for direct investment contracts for insurance reserves - - 8 670 - - 678

Finance margin including management fees (3) 75 170 4 20 - - 269

Profit (loss) from life insurance operations 58 149 1 (76) 28 16 176

Profit (loss) from pension and annuity (1)

Total profit (loss) from life assurance and long-term savings 175

Premium for insurance contracts – new business - - - 245 53 9 307

One-time premium for insurance contracts 2 28 - 58 - - 88

Premium for insurance contracts – new business - - 8 38 - - 46

C-175 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 43 – INCOME TAX

A. Tax laws that apply to the Group companies

1. The Income Tax Law (Inflationary Adjustments), 5745-1985

Under the Law, until the end of 2007, for tax purposes, results of the Group companies in Israel are adjusted to changes in the CPI. The provisions of the law are applicable to the company and the Group companies.

In February, 2008, the Knesset enacted an amendment to the Income Tax Law (Adjustments for Inflation), 5745-1985, limiting the applicability of the Adjustments Law from 2008 onwards. As from 2008, the results for income tax purposes are measured at nominal values with the exception of certain adjustments for changes in the CPI until December 31, 2007. The amendment to the Law includes cancellation of the additions and deductions for inflation and for devaluation as from 2008.

2. Foreign subsidiaries

Foreign subsidiaries are subject to the provisions of the law in the countries in which they operate.

B. Tax rates applicable to the income of the Group companies

1. Companies in Israel

In July 2009, the Knesset passed the Economic Arrangements (Amendments for the Application of the Economic Plan for 2009 and 2010) Law, 5759-2009. The Law includes provisions for an additional gradual decrease of corporate tax, and tax on real capital gain commencing from 2011, at the following tax rates: 2011 – 24%; 2012 – 23%; 2013 – 22%; 2014 – 21%; 2015 – 20% and 2016 onwards – 18%.

Furthermore, in June 2009, the Knesset approved the Value Added Tax Order (Tax Rate on NPOs and Financial Institutions) (Temporary Order), 5769-2009, stipulating that from July 1, 2009 to December 31, 2010, the rate of profit tax that applies to a financial institution will be increased from 15.5% to 16.5%. Following these changes, the total rate of tax that applies to financial institutions is as follows:

2009 – 36.2%; 2010 – 35.6%; 2011 – 34.2%; 2012 – 33.3%; 2013 – 32.4%; 2014 – 31.6%; 2015 – 30.7% and 2016 onwards – 29%.

The statutory tax applicable to the consolidated insurance companies in Israel comprises corporate tax and capital gains tax. The weighted tax rates applying to the consolidated insurance companies in Israel are as follows: in 2007 – 38.53%, 2008 – 36.8%, 2009 – 35.93% and from 2010 and thereafter 35.06%.

2. Foreign companies

− The corporate tax rate applicable to subsidiaries in the USA (federal tax) is 35%. These companies are also subject to local taxes of 3%.

− The tax rate applicable to companies operating in Balkan countries is between 25.5% and 34%.

C. Tax assessments

The company has tax assessments that are final or considered as final up to and including 2005. The majority of the subsidiaries have received tax assessments that are considered final up to and including 2005-2008.

C-176 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 43 – INCOME TAX (CONTD.)

D. Carry forward losses for tax purposes

The Company has carry-forward losses for tax purposes of NIS 200 million at December 31, 2009. The subsidiaries have losses for tax purposes amounting to NIS 1.055 billion at that date. For part of the losses, the subsidiaries recorded deferred tax assets of NIS 351 million in the financial statements. The Company does not recognize deferred tax assets to receive for these losses.

E. Income from deferred tax adjustment

As a result of the changes in the statutory tax rates in Israel, in 2009, the Group recognized deferred tax revenue of NIS 42 million.

F. Deferred taxes

Composition:

Balance Sheet Income statement Year ended December 31 December 31 2009 2008 2009 2008 2007 NIS millions

Property, plant and equipment (605) (455) (146) (38) (35) Real estate investment stated at fair value. - (1,145) - - - Available-for-sale investments stated at fair value (31) 90 (57) 159 3 Adjustments to fair value in business combinations (308) (342) 53 68 18 Other temporary differences (136) 175 53 8 24 Losses transferred for tax purposes 351 355 (25) 67 4 Employee benefits 78 53 10 (11) (4)

Deferred tax income (expenses) (112) 253 10

Deferred tax liabilities, net (651) (1,269)

The deferred taxes are presented in the balance sheet as follows:

December 31 2009 2008 NIS millions

Non-current assets 219 441

Non-current liabilities (870) (1,710)

(651) (1,269)

The deferred taxes are calculated mainly according to the average tax rate of 18%-25% based on the expected applicable tax rate at the time of exercise.

C-177 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 43 – INCOME TAX (CONTD.)

F. Deferred taxes

Deferred taxes for items attributed to equity

December 31 2009 2008 NIS millions

Profit (loss) for available-for-sale financial assets, net 2 72 Others (28) (2)

(26) 70

G. Income tax (tax benefit) in the statement of income

Year ended December 31 2009 2008 2007 NIS millions

Current taxes 105 224 597 Deferred taxes (also see F above) 112 (253) (10) Taxes for prior years (2) (8) 20

215 (37) 607

H. Adjustment of theoretic tax

Below is a presentation of the tax amount that would be applicable if all the income was taxable at the regular corporate tax rates in Israel and the tax amount charged to the statement of income for the reporting year:

Year ended December 31 2009 2008 2007 NIS millions

Profit (loss) before income tax 1,401 (405) 2,307

Statutory tax rate 26% 27% 29%

Statutory tax rate 365 (109) 669

Increase (decrease) in tax liabilities for:

Utilization of loss carried forward from previous years 2 (17) (49) Losses carried forward for which no tax benefit was 52 computed 137 31 Effect of the change in the tax rate (42) 12 (4) Share in earnings of partnerships (20) (3) (2) Taxes for prior years (2) (8) 20 Differences in tax rates between Israel and other (4) countries (6) 41 Exempt revenue, unrecognized expenses and other adjustments, net (mainly earnings from the issue of shares to minorities in subsidiaries) (136) (43) (99)

Income tax in the statement of income 215 (37) 607 Effective tax rate 15% 34% 26%

I. The Company is registered for value added tax purposes as a joint licensed dealer (consolidation of dealers) together with some of its subsidiaries.

C-178 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 44 – NET EARNINGS (LOSS) PER SHARE

Particulars of quantity of shares and the earnings used to calculated the net earnings per share:

Year ended December 31 2009 2008 2007 . Weighted Weighted Weighted quantity Net quantity quantity Net of shares earnings of shares Loss of shares earnings NIS NIS NIS thousands millions thousands millions thousands millions

For calculation of basic net earnings (loss) 11,235 864 11,597 (1,809) 11,543 1,297

Net of the Company’s share in basic loss (earnings) per share of investees - (864) - 1,906 - (1,307) Company’s share in diluted earnings (loss) per share of investees - 842 - (1,993) - 1,293 Effect of potential ordinary shares, diluted 2 - - - 53 -

For calculation of basic net earnings (loss), diluted 11,237 842 11,597 (1,896) 11,596 1,283

NOTE 45 – OPERATING SEGMENTS

A. General

Under IFRS 8, the Group’s operating segments are determined on the basis of management reports, which are mainly based on the investments in each subsidiary.

The operating segments are as follows:

− Fuel operations in Israel: The main operation is marketing and sale of fuels and commodities at gas stations and other outlets and storage and production of fuels in facilities.

− Fuel operations in the US: The main operation is maintenance and operation of gas stations and convenience stores in the US, operation of a refinery and a crude oil pipeline, and marketing of fuels to various customers.

− Fuel operations in Europe: The main operation is marketing and sale of fuels and commodities at gas stations and other outlets in Europe.

− Vehicles and spare parts: The main operation is importing and marketing Mazda and Ford vehicles and spare parts.

− Insurance and finances in Israel: The main operation is carried out by The Phoenix.

− Insurance and finances abroad: The main operation is carried out by Republic in the United States.

− Oil and gas exploration and production: The main operation is carried out under the Yam Tethys joint venture, which operates in oil and gas exploration and production on the continental shelf of the State of Israel.

− Other: The main operation in investment in infrastructure, including mainly desalination and establishment of a power station and the biochemical operation that includes mainly production and marketing of fructose, citric acid and ingredients for nutritional additives.

C-179 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 45 – OPERATING SEGMENTS (CONTD.)

A. General (contd.)

In the past, the Group segments included the real estate segment. Following distribution of Delek Real Estate shares to Group shareholders as a dividend in kind (see Note 14(G) above), details of this segment were presented under discontinued operations and are not included in segment reporting.

The Company's business segments are carried out in several geographic regions worldwide. Israel, the domicile of the Company and of most of the subsidiaries, houses the vehicles and spares marketing operations, oil and gas explorations, insurance operations, part of the fuel products production and marketing. The US houses operations in the fuel products segment, the oil refinery segment, the insurance segment and the oil and gas explorations and production segment. Western Europe houses gas stations and convenience stores operations

B. Segment reporting

1. Revenue

Year ended December 31 2009 2008 2007 NIS millions

Revenue from external entities (1)

Fuel operations in Israel 4,286 5,813 4,837 Fuel operations in the US 10,413 17,118 16,794 Fuel operations in Europe 10,681 14,660 3,715 Automotive 4,743 4,770 4,630 Oil and gas exploration and production 449 447 352 Insurance and finance in Israel *) 10,483 1,201 6,794 Insurance operations abroad *) 1,668 1,490 1,455 Other segments 724 741 541

Total in statement of income 43,447 46,240 39,118

*) Represents insurance premiums on retention in life assurance and general insurance

C-180 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 45 – OPERATING SEGMENTS (CONTD.)

B. Segment reporting (contd.)

2. Segment results and adaptation to net profit (loss)

Year ended December 31 2009 2008 2007 NIS millions

Fuel operations in Israel 230 222 258 Fuel operations in the US 189 188 650 Fuel operations in Europe 97 129 69 Automotive 460 872 670 Oil and gas exploration and production 265 240 135 Insurance and finance in Israel 300 (350) 576 Insurance operations abroad 77 (139) 216 Other segments 137 105 3 Adjustments *) (223) (271) 59

Profit from ordinary operations 1,532 996 2,636

Finance expenses, net 840 1,458 870 Gain from disposal of investments in investees, net 518 69 367 Group share in profits (losses) of associates and partnerships, net 191 (12) 174 Income tax (tax benefit) 215 (37) 607 Profit (loss) from discontinued operations 17 (1,945) 536

Net profit (loss) 1,203 (2,313) 2,236

*) Including expenses not attributed to segments and the Company's share in operating profit of affiliates as included in the segment results.

3. Segment assets

December 31 2009 2008 NIS millions

Corporate insurance operations abroad 5,082 5,300 Corporate insurance and finance in Israel 54,504 28,802 Fuel operations in Israel 3,646 3,590 Fuel operations in the US 3,831 3,801 Fuel operations in Europe 3,511 3,640 Automotive 2,338 2,001 Real estate - 20,004 Oil and gas exploration and production 1,333 1,686 Other segments 1,613 1,703

75,858 70,527

Investments in affiliates

Fuel operations in Israel 46 32 Fuel operations in Europe 138 127 Real estate - 1,064 Oil and gas exploration and production 520 213 Others 1,502 1,424

2,206 2,860 Assets not attributed to segments 6,292 3,242

Total consolidated assets 84,356 76,629

C-181 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 45 – OPERATING SEGMENTS (CONTD.)

B. Segment reporting (contd.)

4. Segment liabilities

December 31 2009 2008 NIS millions

Corporate insurance operations abroad 4,004 3,634 Corporate insurance and finance in Israel 49,823 26,536 Fuel operations in Israel 833 596 Fuel operations in the US 1,029 384 Fuel operations in Europe 1,451 1,094 Automotive 1,275 960 Real estate - 1,211 Oil and gas exploration and production 171 228 Other segments 311 3,469

58,897 38,112 Liabilities not attributed to segments 20,871 34,154

Total consolidated liabilities 79,768 72,266

5. Cost of acquisition of assets, long term

Year ended December 31 2009 2008 2007 NIS millions

Fuel operations in Israel 244 85 906 Fuel operations in the US 557 369 967 Fuel operations in Europe 118 268 2,171 Automotive 3 6 17 Oil and gas exploration and production 353 132 410 Other segments 440 1,908 683

1,715 2,768 5,154

6. Depreciation and amortization

Fuel operations in Israel 67 77 60 Fuel operations in the US 229 150 135 Fuel operations in Europe 196 125 45 Automotive 10 12 11 Oil and gas exploration and production 128 67 - Other segments 345 480 102

975 911 353

C-182 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 45 – OPERATING SEGMENTS (CONTD.)

C. Geographic information

1. Income by geographic markets (by location of customers)

Year ended December 31 2009 2008 2007 NIS millions

Israel 20,072 12,379 16,519 USA 12,457 18,917 18,441 Europe 10,864 14,887 4,112 Other 54 57 46

43,447 46,240 39,118

2. Carrying amounts of segment assets and cost of acquisition of assets, long term, by geographic regions (by location of assets)

Acquisition cost of long-term Segment assets assets Year ended December 31 December 31 2009 2008 2009 2008 2007 NIS millions

Israel 66,474 40,405 1,040 1,688 2,007 USA 12,136 9,889 557 812 976 UK - 9,013 - - - Canada - 2,459 - - - Europe 4,166 10,030 118 268 2,171 Other 2 1,591 - - - Not attributed 1,578 3,242 - - -

84,356 76,629 1,715 2,768 5,154

NOTE 46 – INTERESTED AND RELATED PARTIES

A. The CEO of the Group was granted loans the balance of which, at December 31, 2009, amounts to NIS 14.6 million. The loans are repayable in 2010-2011. Under the terms of the loan agreement, the loans are linked to the CPI and bear annual interest of 4%. The loans are used to acquire shares in Delek Group companies. The acquired shares are used as collateral for the repayment of the loans, and any amount obtained from the sale of the shares will be used first and foremost to repay the loans. Subsequent to the reporting date, the board of directors of the Company approved, after approval by the audit committee, the renewal of the loan amounting to NIS 4.4 million, instead of repayment that was due on January 29, 2010. The repayment date for the new loan is April 29, 2013, under the same terms as the previous loan. The balance is repayable in 2001.

C-183 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 46 – INTERESTED AND RELATED PARTIES (CONTD.)

B. The chairman of the Company’s board of directors was granted loans repayable in 2010-2011. Under the terms of the loan agreement, the loans are linked to the CPI and bear annual interest of 4%. The loans will be used to acquire shares in Delek Group companies, at the discretion of the chairman of the board of directors. The acquired shares are used as collateral for the repayment of the loans, and any amount obtained from the sale of the shares will be used first and foremost to repay the loans. At December 31, 2009, the outstanding loans amount to NIS 9.7 million.

As in prior years, the CEO, chairman of the board of directors and a director were granted options in investees in which they serve. The benefit recognized in the accounting year is included under section G below. In addition, subsequent to the reporting date, in March 2010, the general meeting of DES approved, in view of the change in position of the chairman of the board of directors of the Group from chairman of the board of DES to active deputy chairman of the board of DES, a number of changes will apply to the options plan granted in the past for DES shares, such that the fifth lot of options (11,069 options) will be cancelled and the fourth lot will remain valid. The other terms will remain unchanged.

C. In respect of the options plan granted to CEO and senior officers of the Group, see Note 35(J).

D. For further information regarding the loans and guarantees provided to Delek Real Estate, see Note 14(G) and Note 33(B)(1).

E. The Company and some subsidiaries rent offices from a company owned by the controlling shareholder. The agreement is renewed annually, and its scope is NIS 2.200 million per year.

F. Subsequent to the reporting date, the Company entered into an agreement with Elad Sharon (Tshuva), the son of the controlling shareholder, who serves as the deputy chairman of the board of directors of the Group, in respect of the terms of his service, including director's remuneration and reimbursement of funds in an annual scope of NIS 335,000 (not including reimbursement of expenses).

G. Benefits for interested parties

Year ended December 31 2009 2008 2007 NIS millions

Fees of non-employed directors 1.6 0.7 0.3

Number of directors and interested parties not employed 5 5 5

Fees of employed directors and interested parties (1)(2) 10.4 14.2 12.5

Number of directors and interested parties employed 3 3 3

(1) Including salary expenses recognized for a benefit deriving from the grant of options in investees (2) Including payments of NIS 2.5 million made by a subsidiary to a director in the Group for management services and including an options benefit (in 2008, NIS 4.3 million; in 2007, NIS 3.3 million).

C-184 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 46 – INTERESTED AND RELATED PARTIES (CONTD.)

H. Benefits for senior officers

Year ended December 31 2009 2008 2007 NIS millions

Short-term benefits (salary) 4 8 8 Other benefits 5 4 5

9 12 13

Year ended December 31 2009 2008 2007 NIS millions

Management fees expenses for interested parties 1 - -

Administrative and general expenses for interested 7 parties - -

Finance revenue 41 1 1

J. Delek Israel engaged in a number of agreements with Delek Real Estate to lease gas stations or to establish and lease gas stations. Under the agreements, the lease payments include fixed and variable payments according to fuel sales. The lease payments are linked to the dollar, linked (80%) to the CPI or linked to market price differences between the price of fuel sales to the price of fuel purchases. Annual lease payment expenses amount to NIS 5 million.

K. In May 2009, Delek Israel acquired (subsequent to approval of the audit committee and board of directors of Delek Israel), lease rights in Hatorim gas stations from Delek Real Estate (a company controlled by the controlling shareholder of Delek Israel), for NIS 17 million. The lease rights expire in October 2049.

L. On December 30, 2008, the audit committee and board of directors of Delek Israel approved an agreement to acquire Hakoach Harishon gas station (“the gas station”) from Delek Real Estate (a company controlled by the controlling shareholder of Delek Israel). The value of the gas station was estimated on the basis of the discounted lease contracts of the gas station and the commercial areas at a discount rate that is accepted at Delek Israel. A value of NIS 41.2 was set in a valuation carried out by an external assessor. In March 2009, the station was transferred to Delek Israel, and Delek Israel paid Delek Real Estate NIS 41.6 million.

C-185 DELEK GROUP LTD.

Notes to the Consolidated Financial Statements

NOTE 46 – INTERESTED AND RELATED PARTIES (CONTD.)

M. Subsequent to the reporting date, a transaction was approved between Delek Israel and the controlling shareholder, in which Delek Israel acquired from Delek Real Estate Income Producing Properties Ltd. (Delek Producing Properties) all the shares held by Delek Producing Properties in Ein Yahav - Delek Ltd. ("Ein Yahav"), representing 50% of the issued share capital of Ein Yahav. In addition, Delek Producing Properties will assign loans to Delek Israel that Delek Real Estate provided to Ein Yahav (and which were assigned by Delek Real Estate to Delek Producing Properties). The Company will pay Delek Producing Properties NIS 15.4 million for shares and assignment of the loans.

It was further agreed that Delek Israel would acquire from Delek Projects Initiation and Development Ltd. ("Delek Projects") (a sub-subsidiary of Delek Real Estate), all the shares it holds in Delek- Saadon Projects Initiation and Development Ltd. ("Delek Saadon"), representing 50.1% of the issued shares of Delek Saadon. In addition, Delek Producing Properties will assign loans to Delek Israel, which Delek Real Estate provided to Delek Saadon (and which were assigned by Delek Real Estate to Delek Producing Properties). The Company will pay Delek Projects NIS 7.6 million for shares and assignment of the loans.

In addition, under the terms of the agreement, Delek Israel will acquire from Delek Producing Properties all of its interests in Orhan Mei Megiddo Ltd. (“Mei Megiddo”), representing 50% of the issued share capital of Mei Megiddo. Delek Producing Properties will also assign loans to Delek Israel, which Delek Real Estate provided to Mei Megiddo (and which were assigned by Delek Producing Properties). The Company will pay Delek Producing Properties NIS 4.3 million for shares and assignment of the loans.

Delek Israel will also acquire from Delek Income Producing Properties its rights to be registered as a sub-lessor of land covering 3,884 square meters in Raanana for NIS 9 million.

Under the terms of the agreement, Delek Israel will acquire from Delek Real Estate all the shares it holds in Delek Retail Lots Ltd. (Delek Retail Lots), representing 50% of the issued share capital of Delek Retail Lots. In consideration for the shares, Delek Israel will pay Delek Real Estate NIS 4.6 million. At the same time, Delek Retail Lots will repay a shareholders' loan of NIS 1.6 million.

N. At the end of 2004, Delek Israel and Delek Real Estate established, in equal shares, Delek Retail Lots Ltd. with the aim of locating and acquiring gas stations and land, with the purpose of developing, planning, establishing and operating real estate projects, including gas stations and commercial centers.

In October 2009, Delek Israel provided Delek Retail Lots a loan of NIS 11 million, linked to the CPI and bearing annual interest of 5%. The repayment date of the loan has yet to be determined.

Subsequent to the reporting date, in February 2010, Delek Israel entered into an agreement to acquire all the shares held by Delek Real Estate in Delek Retail Lots (representing 50% of the issued share capital of Delek Retail Lots) for NIS 4.6 million. Delek Retail Lots will also repay shareholders' loans provided by Delek Real Estate for NIS 1.6 million.

In the context of the agreement, Delek Real Estate will be released from a limited guarantee of $10 million that it provided to the bank to secure liabilities given to Delek Retail Lots. This agreement is contingent on the approval of the general meeting of Delek Israel and Delek Real Estate,

O. In the ordinary course of business, the Group companies conduct transactions at market prices and at regular credit terms with corporations that are related parties, at insignificant amounts.

C-186 DELEK GROUP LTD.

Appendix to the Consolidated Financial Statements

PRINCIPAL PARTNERSHIPS AND INVESTEES

Rate of Rate of holding holding of the and control of Group in final the investee retention Name of holding December 31 December 31, company Company 2009 (1) 2009 Presentation % %

Delek Group Ltd. Delek Petroleum Ltd. 100 100 Consolidated Delek Investments and Properties Ltd. 100 100 Consolidated Delek Real Estate Ltd. 5 5 Affiliate

Delek Petroleum Ltd. Delek- The Israel Fuel Corporation Ltd. 77 77 Consolidated Delek Hungary Holding Ltd. 96.7 99.3 Consolidated Delek Europe Holdings Ltd. (2) 80 95.4 Consolidated Held for sale Delek Motorways Services (Jersey) (3) 25 25 (5)

Held by Delek The Israel Fuel Corporation Ltd. Delek Oil Ltd. (formerly Delkol Ltd.) 100 77 Consolidated Bitum Petrochemical Industries Ltd. 60 46 Consolidated Delek Heating Ltd. 51 39 Consolidated Delek Transportation Ltd. (formerly, Shall-Dal Fuel Transportation Services Ltd.) 100 77 Consolidated Delek Retail Ltd. (formerly, Shaarei Delek Development and Management Registered Partnership) 100 77 Consolidated Delek Menta Roads Ltd. 100 77 Consolidated United Petroleum Export Co. Ltd. 75 58 Consolidated Tanker Services Ltd. 75 58 Consolidated Delek retail lots Ltd. 50 38.5 Associate Delek Europe Holdings Ltd. (4) 20 95.4 Consolidated

Delek Pi Glilot – Limited Partnership 100 77 Consolidated Delek Hungary Holding Ltd. 3.3 99 Consolidated

Held by Delek Hungary Holdings Inc.

Delek US Holdings Inc. 74 74 Consolidated

Held by Delek US Holdings Inc.

MAPCO Express Inc. 100 74 Consolidated MAPCO Family Centers 100 74 Consolidated MAPCO Fleet Inc. 100 74 Consolidated Delek Refining Inc. 100 74 Consolidated Delek Marketing and Supply Inc. 100 74 subsidiaries

Held by Delek Europe Holdings Ltd.

Delek Benelux B.V. 100 95.4 Consolidated

(1) Direct and indirect ownership and control (without the holdings of Excellence exchange traded funds) (2) Held by Delek – The Israel Fuel Corporation Ltd. (20%) (3) Held by Delek Real Estate Ltd. (75%) and Delek Petroleum (25%) (4) Held by Delek Petroleum Ltd. (80%) (5) See Note 14(M) (2)

C-187 DELEK GROUP LTD.

Appendix to the Consolidated Financial Statements

Rate of Rate of holding holding of the and control of Group in final the investee retention Name of holding December 31 December 31, company Company 2009 (1) 2009 Presentation % %

Delek Investments and Properties Ltd. Delek Capital Ltd. 94 94 Consolidated Delek Infrastructure Ltd. 100 100 Consolidated Delek Ecology – Limited Partnership 100 100 Consolidated Delek Automotive Systems Ltd. 54.9 54.9 Consolidated Gadot Biochemical Industries Ltd. 64.1 64.1 Consolidated Delek Energy Systems Ltd. (“DES”) 79.7 79.7 Consolidated Delek Drilling Limited Partnership 6.8 56.5 Consolidated Yam Tethys Joint Venture 4.4 30.9 Affiliate Delek and Avner Yam Tethys Ltd. (SPC) 9.1 39.2 Affiliate Avner Oil Exploration - Limited Partnership 13 50 Affiliate The Phoenix Holdings Ltd. (2) 29.1 54.6 Consolidated

Held by The Phoenix Holdings Ltd. The Phoenix Insurance Company Ltd. 100 54.6 Consolidated Phoenix Insurance Investments and Finance Ltd. 100 54.6 Consolidated

Held by The Phoenix Insurance Company Ltd. Salit Investments and Holding Co. Ltd. 100 54.6 Consolidated Hadar Yarok Properties and Investments Ltd. 100 54.6 Consolidated

Held by Phoenix Investments and Finance Ltd. ADC Holdings Ltd. (3) 33.3 36.5 Consolidated Atara Technology Ventures Ltd. 100 54.6 Consolidated Atara Partnership Management Ltd. 100 54.6 Consolidated Excellence Investments Ltd. 60.4 33 Consolidated Mehadrin Ltd. 41.42 22.6 affiliate Ampal Protected Living (1994) Ltd. 100 54.6 Consolidated Ampal Protected Living (1998) Ltd. 100 54.6 Consolidated Ampal Protected Living (1966) Ltd. 100 54.6 Consolidated Amhal Ltd. 100 54.6 Consolidated

Held by Delek Capital Ltd. The Phoenix Holdings Ltd. (2) 27.1 54.6 Consolidated Delek Finance US Inc. 100 94 Consolidated Delek Capital Ltd. 47.8 45 affiliate

Held by Delek US Holdings Inc. Republic Companies Inc. 100 94 Consolidated

Held by Delek Infrastructures Ltd. IDE Technologies Ltd. 49.8 49.8 Affiliate

Held by Delek Ecology – Limited Partnership I.P.P. Delek Ashkelon Ltd. 100 100 Consolidated

Held by Delek Automotive Systems Ltd. Delek Motors Ltd. 100 54.9 Consolidated Delek Motors Spare Parts (1987) Ltd. 100 54.9 Consolidated DMR Properties (1985) Ltd. 100 54.9 Consolidated DSR – Delek Automobile Agencies 1994 – Registered Partnership 75 41.2 Consolidated ADC Holdings Ltd. (3) 33.3 36.5 Consolidated

(1) Direct and indirect ownership and control (without the holdings of Excellence exchange traded funds) (2) Held by Delek Investments and Properties Ltd. and Delek Capital Ltd. The overall control in Phoenix is 55.7% (3) Held by Delek Automotive Systems Ltd. (33.3%) and Phoenix Holdings Ltd. (33.3%).

C-188 DELEK GROUP LTD.

Appendix to the Consolidated Financial Statements

Rate of Rate of holding holding of the and control of Group in final the investee retention Name of holding December 31 December 31, company Company 2009 (1) 2009 Presentation % %

Held by Delek Automotive Systems Ltd. Delek Drilling Management (1993) Ltd. 100 79.7 Consolidated Delek Drilling Trusts Ltd 100 79.7 Consolidated Delek Energy Debentures Ltd. 100 79.7 Consolidated Delek Drilling Limited Partnership 62.3 57 Consolidated Avner Oil and Gas Ltd. 50 40 Affiliate Avner Oil Exploration - Limited Partnership (1) 39.02 50 Affiliate Avner Trusts Ltd. 50 40 Affiliate Delek Energy International Ltd. 100 79.7 Consolidated Delek Energy System US Inc. 100 79.7 Consolidated Delek Energy System (Gibraltar) Ltd. 100 79.7 Consolidated Delek Energy System (Rockies) LLC 100 79.7 Consolidated Matra Petrolum Plc 29.3 23 Affiliate Viking Oil Gas International Ltd 25.1 20 Affiliate

Held by Delek Drilling Limited Partnership Proportionate Yam Tethys Joint Venture 25.5 26 consolidation Proportionate Delek and Avner Yam Tethys Ltd. (SPC) 48.7 39 consolidation Proportionate Michal Matan Joint Venture 15.1 16 consolidation

Held by Avner Oil Exploration - Limited Partnership Proportionate Yam Tethys Joint Venture 23 26 consolidation Proportionate Delek and Avner Yam Tethys Ltd. (SPC) 43.7 39 consolidation Proportionate Michal Matan Joint Venture 15.1 16 consolidation

Held by IDE Technologies Ltd. VID Desalination Company Ltd. Israel 49.8 25 Affiliate OTID Desalination Partnership 49.8 25 Affiliate

(1) Direct and indirect ownership and control (without the holdings of Excellence exchange traded funds)

C-189 Chapter 4: Additional Information about the Company

Company: Delek Group Ltd. Company no. in the Registrar of Companies: 52-004432-2

Date of Balance Sheet: December 31, 2009 (Regulation 9) Date of report: March 24, 2010 (Regulation 1 and 7)

Regulation 9: Financial Statements Audited financial statements as at December 31, 2009 with enclosed auditor's report are attached hereto. Regulation 9A: Pro-forma event in the reporting year through to the date of approval of financial statements None Regulation 9B: Annual report pertaining to the board of directors and the management's assessment of the effectiveness of the internal audit Report is included in the Board of Director's report on the State of the Company's Affairs. Regulation 9C: Financial data from the Company's consolidated financial statements pertaining to the company itself Financial Information from the consolidated financial statements of the Company are attached hereto Regulation 10: Directors' Report on the State of the Company's Affairs The Directors’ Report on the State of the Company’s Affairs as on December 31, 2009 is attached hereto. Regulation 10A: Summary of the Company's consolidated statements of income for each of the quarters of 2009 Attached hereto (in the Directors’ Report) is a summary of the quarterly statements of income of the Company. Regulation 10C: Use of proceeds for securities, with special reference to the proceeds based the prospectus The proceeds received by the Company for the issue of debentures in September and in November 2009, under the shelf prospectus dated August 2009, are used by the Company to finance its business operations. In the foregoing period, NIS 1,350 million was raised with debentures, of which the majority (USD 800 million) was used to repay loans and debts of the Company, and the balance of the proceeds are earmarked for future investments as part of the Company's business operations.

D-1 Regulation 11: Company's investments in each of its subsidiaries and affiliates as at the date of the statements of income: Companies held directly by the Company

Total investment at Loan No. of par date of TASE price of balances in Security value/units % in statements of security at statements of no. on Type of held by the Capital held voting income (NIS statements of income (NIS Company the TASE security Par value Group (%) rights millions) (*) income date millions) Delek Investments and Ordinary - NIS 0.01 5,586,407 100 100 1,740 - 3,096 Properties Ltd. shares Ordinary Delek Petroleum Ltd. - NIS 0.01 1,100 100 100 1,766 - 925 shares

Subsidiaries and affiliates of Delek Investments and Properties Ltd.

Total investment Loan at date of TASE price balances in statements of security at statements No. of par of income statements of income Security no. Type of value/units held Capital held % in voting (NIS of income (NIS Company on the TASE security Par value by the Group (%) rights millions) (*) date millions) Delek Automotive Systems Ordinary 829010 NIS 1 49,942,280 54.83 54.83 367 42.3 - Ltd. shares Ordinary Delek Energy Systems Ltd. 565010 NIS 1 3,990,702 79.72 79.72 22 970 53 shares Delek Drilling – Limited Participating 475020 - 38,037,920 6.88 6.88 60 9.06 135 Partnership units Avner Oil Exploration - Participating 268011 - 442,175,480 13.25 13.25 110 1.40 - Limited Partnership units

D-2 Subsidiaries and affiliates of Delek Investments and Properties Ltd. (cont.)

Total investment Debenture at date of TASE price and loan No. of par statements of security at balances in Security value/units of income statements statements no. on the Type of held by the Capital held % in voting (NIS of income of income Company TASE security Par value Group (%) rights millions) (*) date (NIS millions) Gadot Biochemical Ordinary 149 14.78 - Industries Ltd. 1093004 shares NIS 0.1 7,200,000 64.11 64.11 Ordinary 10.13 - 767012 shares NIS 1 59,213,577 Phoenix Holdings Ltd. 28.65 27.09 844 Ordinary 40 - 767038 shares NIS 5 2,355,663 Ordinary (6) - 119 I.P.P. Delek Ashkelon Ltd. - shares NIS 1 1,001,000 100 100 Ordinary 295 - - IDE Technologies Ltd. - shares NIS 1 632,715 50 50 Ordinary Delek Capital Ltd. - shares NIS 0.01 940 94 94 (468) - 1,857

Subsidiaries and affiliates of Delek Energy Systems Ltd.

Total Debenture investment at and loan date of TASE price of balances in Security No. of par statements of security at statements no. on the Type of Par value/units held Capital % in voting income (NIS statements of of income Company TASE security value by the Group held (%) rights millions) (*) income date (NIS millions) Delek Drilling – Limited Participating Partnership (*) 475020 units - 340,855,709 62.32 62.32 221 9.06 - Avner Oil Exploration - Participating Limited Partnership 268011 units - 1,519,025,317 45.55 45.55 578 1.40 -

(*) Including holdings through wholly-owned company

D-3 Subsidiaries and affiliates of Delek Capital Ltd.

Total Debenture investment at and loan No. of par date of TASE price of balances in Security value/units statements of security at statements no. on the Type of held by the Capital % in voting income (NIS statements of of income Company TASE security Par value Group held (%) rights millions) (*) income date (NIS millions) Ordinary 767012 NIS 1 59,107,088 10.13 - shares Phoenix Holdings Ltd. 26.69 26.62 916 Ordinary - 767038 5 ₪ 1,405,419 shares 40 Delek Finance US Inc. (*) Ordinary - 0.01$ 100 99.9 99.9 251 - 91 shares Ordinary Delek Capital Ltd. - NIS 0.01 499,000 47.85 47.85 57 - 51 shares (*) Holds 100% of Republic shares

Subsidiaries and affiliates of Delek Petroleum Ltd.

Total Debenture investment and loan at date of TASE price balances in statements of security at statements Security No. of par of income statements of income no. on Type of value/units held Capital % in voting (NIS of income (NIS Company the TASE security Par value by the Group held (%) rights millions) (*) date millions) Ordinary Delek US Holdings Inc. (***) NYSE 0.01 $ 39,500,195 73.58 73.58 1,346 25.7 245 shares Delek- The Israel Fuel Ordinary 6360044 NIS 1 8,761,774 77.4 77.4 810 125 207 Corporation Ltd. shares Ordinary Delek BeneluxB.V (**) - EUR 0.01 1,800,000 100 100 642 - 95 shares

(*) The majority of the holdings are indirectly held through a wholly-owned subsidiary: Delek Hungary (**) Held by Delek Europe Holdings Ltd., which is held by Delek Petroleum Ltd. and Delek the Israel Fuel Corporation Ltd. at 80% and 20%, respectively.

D-4 Regulation 12: Material changes in investments in subsidiaries and affiliates in the reporting period:

Share no. Nature of the on the Cost Date of change change Company TASE Type of share Total par value (in NIS millions) 8.8 shares of Delek Distribution of a 31.3.2009 Delek Real Estate Ltd. 1093293 Ordinary shares Real Estate for each - dividend in kind share in the Company Delek The Israel Fuel Corporation 15.6.2009 Sale 6360044 Ordinary shares 720,000 64 Ltd. 23.6.2009 Sale Delek Energy Systems Ltd. 565010 Ordinary shares 107,750 - 9.12.2009 Sale HOT Cable Media Systems Ltd. 510016 Ordinary shares 9,127,271 207 Avner Oil Exploration - Limited 22.11.2009 Exchange 268011 Participating units 247,926,781 350 Partnership

Other material changes: For additional information pertaining to the allocation of Delek Real Estate shares as dividend in kind, see Note 13 to the consolidated financial statements.

D-5 Regulation 13: Comprehensive and net income of subsidiaries and affiliates and corporate revenues therefrom as of the reporting date of the statements of income for the year ended December 31, 2009

Annual profit (loss), net Annual comprehensive profit (loss) Revenues received in the Company from: Attributable to Equity attributed to Attributable to Equity attributed Company holders of minority Company to holders of Company shareholders rights shareholders minority rights Dividend Interest Management fees Delek Automotive Ltd. 434 - 450 - 409 - 1

Delek Energy Ltd. (34) 56 (39) 54 - 35 -

Delek Drilling – Limited 133 - 133 - - - - Partnership

Gadot Biochemical 24.5 - 24.5 - - - - Industries Ltd.

I.P.P. Delek Ashkelon Ltd. 20 - 20 - - 6 1

Phoenix Holdings Ltd. 227 - 415 - - - -

Delek US Holdings Inc. 32 - 40 - 8 5 2

Delek The Israel Fuel 90 4 88 4 21 13 1 Corporation Ltd.

Delek Benelux 44 - 59 - - - -

Republic Companies 17 - 16 - - - 2 Group Inc.

Avner Oil Exploration - 129 - 129 - - - - Limited Partnership

IDE Technologies Ltd. 279 - 279 - - - 2

Delek Real Estate (1,109) (202) (962) (143) - - -

D-6 Regulation 14: List of categories of loan balances granted as of the statement of financial affairs date, if granting the loans was one of the corporation’s main businesses Extending of loans is not one of the Company's main businesses

Regulation 20: Trading the Company’s securities on the TASE, dates and reasons for interruption of trade Securities listed for trade: In Q2 of 2009, an additional 3,890 ordinary shares of NIS 1 par value each were listed for trade as a result of the conversion of Debentures (Series E) into shares of the Company. In Q1 of 2010, an additional 33,416 ordinary shares of NIS 1 par value each were listed as a result of the exercise of warrants for purchase of the Company's shares. During the latter half of 2009 119,234,184 Debentures (Series N), 1,048,008,277 Debentures (Series O), 260,000,000 Debentures (Series P), 90,000,000 Debentures (Series Q), 300,000,000 Debentures (Series R) and 260,000 Warrants (Series 6) were listed for trade. Interruption of trade: Date of interruption Reason for interruption of trade Publication of the Company's financial statements as at 31 30.11.2009 September 2009 Publication of the Company's financial statements as at 30 June 30.08.2009 2009 Company's announcement that it intends publishing an immediate report concerning a significant event (financial investment in Noble 19.08.2009 shares) and due to the publication of said immediate report. Publication of the Company's financial statements as at 31 March 27.05.2009 2009 Publication of the financial statements of the foreign subsidiary, 07.05.2009 Delek USA.

D-7 Regulation 21: Payments made to senior officers (NIS thousands)

21A(1): Below is a breakdown of the benefits given in 2009 to each of the five recipients of the highest benefits among the senior officers at the Company or at a corporation under its control, and which were given to them in lieu of their tenure at the company or at a corporation under its control, as recognized in the financial statements (the figures hereunder represent the cost to the employer):

Benefits in lieu of services Details of benefit recipient Other benefits Total* Share-based payment

% of holding Employme Management In the Out the Interest Name Position of Company's Salary Bonus Other nt basis fees money money * capital

David Kaminitz CEO fully 0 1,461 2,000 8,100 - - - 11,561 (1) Delek Israel

Gideon CEO Tadmor fully 0 1,591 - - 6,568 - - - 8,189 Delek Energy (2)

Uzi Yamin CEO Delek - fully 0 486$ - 1,232$ - 290$ 2,008$ (3) USA

CEO of fully 0 1,258 - 2,256 6,011 - - - 9,525 Eyal Lapidot Phoenix (4) (5) CEO fully 0 2,201 - 4,000 2,131 - - - 8,332 Delek Israel

Chairman of Roni Biram Excellence 80% 0 1,127 - 3,300 - - 410 - 4,837 (6) Investments

D-8 21A(2): Below is a breakdown of the benefits paid to each of the Company's three senior officers who are not among those appearing in the foregoing table, in lieu of their tenure at the Company and at corporations under its control, as recognized in the financial statements:

Benefits in lieu of services Details of benefit recipient Share-based payment Total* Share-based payment

% of holding Employme Management Consultatio In the Out the Name Position of Company's Salary Bonus Commission Other nt basis fees n fees money money ** capital

CEO Asi Bartfeld 3,000 The fully 0.05 1,516 - - - - - 177 4,693 (7) (11) Company

Chairman, Gabi Last Board of fully 0.06 1,715 - - - - - 1,353 147 3,215 (8) Directors.

VP, Legal Liora Pratt counsel and 600 Levin fully 0 877 ------1,477 company (9) secretary

D-9 21A(3): The table below presents details of the remuneration paid to each of the Company's senior officers who are not represented in the foregoing table, with respect to their service in the Company and in its investees:

Benefits in lieu of services Details of benefit recipient Share-based payment Total* Share-based payment

% of Employmen holding of Management Consultatio In the Out the Name Position Salary Bonus Commission Other t basis Company's fees n fees money money ** capital

Moshe Amit Director fully 0 903 1,000 - - - - 614 - 2,517 (10)

Directors fees include for participation in meetings (with the exception of payments to directors who are officers) in the reported year amounted to NIS 1,148,000. For information pertaining to benefits for the chairman, vice chairman and Company CEO see Regulation 21 above.

** Subsequent to the global crisis in 2008, as with the rest of the market, changes occurred in the prices of shares of the Company and its subsidiaries. Subsequently the financial value declined significantly of part of the share based payments granted by the Company and its subsidiaries under the benefits plan for senior officers and which had not yet vested or were not exercised. A situation was created whereby the accounting costs attributed in the Company's financial statements, based on the GAAP, does not constitute the financial value of the actual benefits that the officer received. Consequently, as at the reporting date, the Company still estimates that part of the options are out of the money and that the inclusion of the annual accounting costs of these share based payments do not reflect the real value of the benefit (including options) that the officers received in 2009. In order to reliably reflect the value of the senior officers' benefits as at December 31, 2009 and due to the application of Regulation 21, the Company decided to present an additional column in the above table, representing the total benefits received without the share based benefit, which appears under "Out of the Money".

D-10 Regulation 21 – cont'd Notes on the figures represented in the tables: (1) Mr. David Kaminitz – serves as CEO of Delek Israel since June 1, 2009 under a service contract which became effective in April 2009 for a handover period with the outgoing CEO. According to the contract the management company will provide Delek Israel with the services of David Kaminitz, who will serve personally as CEO of Delek Israel. Each party shall be entitled to terminate the agreement with three months' written advance notice("the advance notice"). During the advance notice period, the management company shall be entitled to receive management fees and the balance of payments it is entitled to with respect to the services provided by Mr. Kaminitz. The Company will also provide a car and communications means, and the advance notice period shall be taken into account for the vesting for unvested options. Furthermore, Mr. Kaminitz shall be entitled to a three month adaptation period which shall commence from the end of the early notice period, during which the management company shall not provide Delek Israel with any services and shall receive management fees in full and all other payments that the management company is entitled to under the contract, including a car and communication means and payment therefor. In the event of termination of services initiated by the management company, the adjustment period shall not be taken into account for determining the annual bonus and for the vesting of unvested options. In the event of termination of services initiated by Delek Israel, the adjustment period shall be taken into account for determining the annual bonus and for the vesting of unvested options, and for exercise of vested options. Delek Israel pays the management company monthly management fees of NIS 134,273 (with the addition of VAT, CPI linkage and shall be updated monthly). Management fees include payment for a period of up to 22 days per year during which management services are not provided to Delek Israel, and in the event that the management services are not provided for a cumulative period of up to 30 days per year for reasons of Mr. Kaminitz's health, the management fees shall be paid in full. The management company shall be entitled to a bonus once every calendar year for the duration of the contract which shall be set by the board of directors of Delek Israel, at its sole discretion. The management company shall provide Mr. Kaminitz with a car, telephone and mobile pone, high speed internet access and expenses as is the norm in the Company and similar companies, and Delek Israel shall bear all these costs, which will be added in full to the management fees. Mr. Kaminitz shall be covered by the Company's officers insurance policy and he shall be given a letter of indemnification undertaking. Delek Israel included in its financial statements for 2009 provision for a bonus for Mr. Kaminitz in the amount of NIS 2 million. The board of directors of Delek Israel approved a phantom options plan for Mr. Kaminitz, according to which Mr. Kaminitz shall be entitled to a monetary bonus equivalent to the difference between the market value of Delek Group's shares and the exercise price at exercise date of the bonus, for 300,000 phantom options constituting 2.6% of Delek Israel's share capital. The options may be exercised in four equal tranches on March 1 of each year commencing March 1, 2010 through March 1, 2013 at an exercise price ranging between NIS 136.49 per unit for the first tranche and NIS 158 per unit for the final tranche. (2) Mr. Gidon Tadmor – serves as the single fulltime CEO of Delek Energy since July 1, 2007. Mr. Tadmor monthly salary is NIS 82,840, gross. Mr. Tadmor is entitled to reimbursement of expenses, a pension plan, in-service study fund and an annual vacation of 23 days per every full year of employment, and to sick leave and rest and recreation days. Delek Energy provides Mr. Tadmor with a company car and additional fringe benefits such as his inclusion in insurance arrangements, officer indemnification and reimbursement of expenses for the purpose of fulfilling his position. His term of employment according to Mr. Tadmor’s employment agreement began on August 1, 2007 and mutual advance notice of 3 months and an acclimation period of 3 months were agreed upon. In addition, it was agreed that the CEO would be entitled to the full salary, benefits, grants and bonuses stipulated in the agreement for a minimum of 12 months from the date of signing of the agreement. He would also be eligible for one annual bonus based on the performance of Delek Energy, as shall be determined by the board of directors. In August 2007 Delek Energy’s board of directors approved allocation for Mr. Tadmor of 258,265 unlisted options, exercisable for 258,265 ordinary shares of Delek Energy. Should Mr. Tadmor exercise all of the options, the exercised shares would constitute 5.3% of Delek Energy’s issued and paid-up share capital and Mr. Tadmor would hold 5.39% of Delek Israel's issued and paid-up share capital, fully diluted. The vesting dates of the options are in 7 equal annual tranches until 2014. In order to exercise the options, Mr. Tadmor will be eligible for a loan from Delek Energy bearing annual interest of 4% and linked to the known CPI on the date upon which the loan is extended. The loan will be a non-recourse loan that will be secured solely by a first degree fixed charge on the underlying shares. The financial value of all the options allocated to the CEO, including the non-recourse loan, which arises from the estimated value of the options is NIS 32.126 million. The number of options that have vested as at reporting date is 110,684, and, as stated in the table, the expense that was recorded by Delek Energy in respect to the share-based benefit as at reporting date is NIS 6,568,000.

D-11 (3) Mr. Uzi Yamin – serves as CEO of Delek USA since 2001. In September 2009 a new employment contract was signed between Delek USA and Mr. Yamin, according to which Mr. Yamin is entitled to a monthly salary of USD 39,000, which will be paid to Mr. Yamin retroactively as of January 2009. Furthermore, Mr. Yamin shall be entitled to various benefits such as a company car, residence owned by Delek USA, education expenses and telephone. The board of directors of Delek USA may, at its sole discretion, decide to grant Mr. Yamin an annual bonus. The contract period is from May 1, 2009 through October 31, 2013. Either party is entitled to terminate the contract with advance notice of twelve months or the balance of the contract term (the shorter of the two). Under the terms of the new employment contract, Mr. Yamin was awarded 1,850,040 stock appreciation rights (SAR), in accordance with Delek USA's benefit plan for 2006. The rights will vest in installments from March 31, 2010 through October 31, 2013, at various exercise prices. The rights will expire one year following the termination of Mr. Yamin's employment, or on October 31, 2014, the earlier of the two dates. The financial value of the rights is approximately USD 2 million. The rights are exercisable for ordinary shares or cash, at the sole discretion of Delek USA. Moreover, in September 2009, Delek USA board of directors approved the settlement pertaining to 1,319,493 options awarded to Mr. Yamin under his previous employment contract and which were not exercised by their expiry date and for which the exercise period could not be extended. Under the foregoing settlement, Mr. Yamin may receive in shares the difference TASE share price and the theoretic exercise price, as set out in the agreement. In February 2010, Mr. Yamin exercised his rights under the foregoing settlement and Delek USA awarded him 638,909 shares in lieu of the expired options. (4) Mr. Eyal Lapidot – CEO of Phoenix. In the past, Mr. Lapidot served as CEO of Delek Israel, from July 17, 2005 through May 31, 2009 (though employer-employee relations continue through to July 31, 2010). Under his employment contract with Delek Israel, Delek Israel or Mr. Lapidot had the right to terminate the agreement at any time, with 4 months advance notice (“the Advance Notice Period”) At the end of the advance notice period, Mr. Lapidot was entitled to an acclimation period of 6 consecutive months, during which he would not be required to perform any work for Delek Israel and would receive his full salary including the payments, provisions and rights that he was entitled to receive under the agreement Mr. Lapidot's monthly salary (gross) was NIS 75,000 (linked to the CPI – positive only). After one year of employment, ( in every year of employment and/or part thereof) Mr. Lapidot was eligible for an annual bonus, in view of his efforts and achievements and the achievements of Delek Israel, provided this is no lower than the rates detailed in the agreement, which are calculated from Delek Israel’s net profit (not including capital gains or losses stemming from operations that began before the date of signing of the agreement and/or losses from the fuel operations in the US), with the bonus not exceeding NIS 4 million in any case. In addition, Mr. Lapidot was entitled to directors insurance, in-service study fund, a car allowance, telephone and mobile phone expenses, vacation days, sick leave, convalescent pay, reimbursement of expenses as is customary at Delek Israel and so forth. The employment agreement included a commitment by Mr. Lapidot not to compete with Delek Israel either during the course of his employment or during the acclimation period. It is noted that Delek Israel made provisions in its financial statements for the period ended December 31, 2009, in the amount of NIS 4,000,000 for the bonus that Mr. Lapiodot may be entitled to receive, based on Delek Israel's profits for 2009, and the Company's assessment concerning the company's net profits for 2010. In May 2007 Delek Israel awarded Mr. Lapidot 486,589 options, gratis, for acquisition of 486,589 ordinary shares in Delek Israel, which as at the date on which they were awarded, constituted 5% of the issued and paid-up share capital of Delek Israel. The said options vested and will vest for Mr. Lapidot, at unequal rates, on five vesting dates, the last of which will be on July 17, 2010. The said options are exercisable subject to their vesting dates, beginning on the date of allotment through December 31, 2010. On August 27, 2009 the company's board of directors resolved to amend the option agreement with Mr. Lapidot so that an options exercise mechanism would be added, based on cashless exercise, similar to that for Delek Israel employees who were awarded options, as set forth in the 2007 options plan approved by the company's board of directors on November 5, 2007. On September 22, 2009, Mr. Lapidot exercised 437,930 options by means of the foregoing exercise mechanism for 253,782 shares, which at reporting date constitute 2.24% of Delek Israel's issued and paid-up share capital. Mr. Lapidot terminated his term as CEO of Delek Israel on May 31, 2009. Under the foregoing employment contract, the employer-employee relations between Delek Israel and Mr. Lapidot will end at the end of the cumulative period of the advance notice period, the acclimation period and the actual utilization of the accrued vacation balances, on July 31, 2007. (5) On June 1, 2009 Mr. Lapidot began serving as CEO of Phoenix Holdings and Phoenix Insurance. Under the terms of his employment contract, which was approved by the board of directors of Phoenix (the transaction agreement is yet to be signed), Mr. Lapidot is entitled to a monthly salary of NIS 120,000, which will be updated monthly, according to the CPI increase. Furthermore, Mr. Lapidot will be eligible for an annual bonus, in every year of employment and/or part thereof, at the rates set forth in the contract, which in any event, shall not be less than NIS 1.2 million, linked to the CPI and the base index shall be the CPI for

D-12 November 2008. Mr. Lapidot will be eligible for a bonus annually, throughout the entire term of the employer-employee relationship between Mr. Lapidot and Phoenix, including during the advance notice and acclimation periods. In addition, Phoenix insures Mr. Lapidot under the officers insurance policy that Phoenix purchased and issued him with a letter of indemnification undertaking and exemption of liability customary for senior officers at Phoenix. Furthermore, Phoenix undertook to ensure to issue a run off policy for Mr. Lapidot until the end of the limitation period with respect to Mr. Lapidot's tenure as an officer at Phoenix if there will be a transfer of control at Phoenix. Mr. Lapidot is also entitled to an acclimation period of 6 consecutive months, from the end of the advance notice period and the actual utilization of any accrued vacation during which Mr. Lapidot will be required to perform work for Phoenix. During the acclimation period, Mr. Lapidot will receive his salary in full from Phoenix, including all payments, provisions and rights to which he is entitled under the terms of his employment. The acclimation period shall be considered a cooling off period, unless if Mr. Lapidot waives the payment for the acclimation period, when the cooling off period will be cancelled. Furthermore, Mr. Lapidot is entitled to receive directors / pension insurance and work disability insurance, in-service study fund, annual vacation days, convalescence pay, sick leave, company car, media and internet, health insurance and reimbursement of expenses. In August 2009, Phoenix approved an options plan for Mr. Lapidot to acquire up to 2.5% of Phoenix's issued share capital (in lieu of the loan to purchase shares that was approved but not actually granted). The exercise price for the options was NIS 7.976 per share with the addition of annual adjusted interest at 3.75% that will be calculated from the first vesting date through the rest of the vesting dates of the options. The options will vest over a period of four years from the commencement of Mr. Lapidot's employment through June 1, 2013, and the options will expire on June 1, 2014 if not exercised by this date, subject to Mr. Lapidot's continued employment at Phoenix until aforesaid dates. The vesting dates as aforesaid will be accelerated in the event of any changes in the control of Phoenix or in the event of Mr. Lapidot's dismissal (other than in certain circumstances). Mr. Lapidot may exercise the options at his discretion by way of net exercise, that is to say, the exercise will not award Mr. Lapidot with the full number of shares deriving from the options, rather only the number of shares that reflect the amount of the financial benefit of the options at the exercise date and the CEO will not be required to pay the exercise price for the options. Alternatively, if the CEO chooses not to exercise the options by way of the net exercise mechanism, Mr. Lapidot will be eligible to receive a loan from Phoenix for paying the exercise price. The foregoing loan will be a non recourse loan, linked to the known consumer price index at the date of receiving the loan, and at 4% annual interest until it is repaid, and shall be secured only by a first degree charge on the shares deriving from the exercise of the options. The loan will be repaid in the occurrence of certain events and no later than June 1, 2015. In the event of a rights issue, Phoenix will offer Mr. Lapidot identical rights, under the same conditions, as though he exercised the options shortly prior to the effective date for the issue of rights, and Mr. Lapidot will be eligible to receive a loan that is not a non recourse loan, from Phoenix for exercising the said rights, under the terms of the loan set forth above. (6) Mr. Roni Biram – serves as Chairman of Excellence Investments. Mr. Biram's salary includes a monthly salary of NIS 65,000 linked to the CPI of June 2006, provisions for customary fringe benefits, value of company car and mobile phone. Mr. Biram is entitled to an annual bonus based on the performance of Excellence Group. Each of the officers is entitled to 5% of the consolidated profits of Excellence, pre-tax, exceeding NIS 100 million, as resolved by the general meeting of Excellence shareholders on November 18, 2007. As included in the salary agreement between Phoenix and Roni Biram, and Gil and Esther Deutsch (referring to the first and second quarters of 2009 only) (and later terminated). Also see Note 14 to the financial statements. (7) Mr. Asaf Bartfeld – is employed as the Company CEO from 2003. Mr. Bartfeld's monthly salary is NIS 84,654, gross. The salary is linked to the Consumer Price Index. Mr. Bartfeld is also entitled to a special bonus, at the discretion of the Company's board of directors, a convalescent bonus, annual vacation days, in-service study fund, severance benefits and pay, a company car and payment for the expenses thereof and payment of the telephone expenses at the CEO’s home. The monthly salary and convalescent bonus constitute the basis for provisions for fringe benefits. The agreement is for an unlimited period or until age 65. The Company is entitled to terminate the agreement with 12 months advance notice, and Mr. Bartfeld is entitled to terminate the agreement with 4 months advance notice. The Company may waive employment during the advance notice period and pay a salary for this period. Under special circumstances, the Company is entitled to terminate the employment agreement immediately. In addition to the foregoing severance compensation, in the event of dismissal, Mr. Bartfeld is entitled to a retirement bonus in the amount of the determining salary for provisions for fringe benefits, for each year of employment, and in the event of resignation, Mr. Bartfeld is entitled to a retirement bonus in an amount equivalent to half of the foregoing amount.

D-13 The total cost to the Company (Delek Investments) in respect to Mr. Bartfeld’s salary and expenses (without the share-based payment) in the year 2009 amounted to the sum of NIS1,516,000 (excluding the bonus for 2009, since the board of directors is yet to approve it). Loans: Over the years Mr. Bartfeld received several loans from Delek Investments for the purpose of acquiring securities of companies belonging to the Delek Group. These loans are linked to the CPI and carry interest at a rate of 4% per annum. With regard to one of the loans, in the sum of NIS 2,339,000 which was intended for the purchase of shares of the subsidiary Gadot Biochemical Industries Ltd, and whose due date was extended to August 10, 2011, it was determined that in the event of a breach of the borrower’s commitments, Delek Investments would be able to be repaid only out of the shares that serve as collateral. In January 2010, the Company's audit committee and board of directors decided again to grant a loan in the amount of NIS 4,400,000, which was approved for the CEO in 2004, and which as at December 31, 2009 amounts to NIS 6,793,000, for a period of three years and three months, i.e. until April 4, 2013, under the same terms as originally approved (linked to the CPI and bearing 4% interest) for purchasing securities of companies belonging to Delek Group. The balance of Mr. Bartfeld's total loan (including the loan granted for the purchase of IDE shares as set forth below) as at December 31, 2009 was NIS 14,586,000. The foregoing loan was approved as a non recourse loan. Repayment dates of the loans are August 10, 2011 (loan principal in the amount of NIS 2,338,000), March 30, 3011 (loan principal in the amount of NIS 500,000), April 29, 2013 (loan principal in the amount of NIS 4,400,000) and November 29, 2010 (loan principal in the amount of NIS 3,064,000). Allocation of securities: In December 2006, Mr. Bartfeld was given the option to purchase 28,000 ordinary shares of Delek USA, in which he serves as a director, in return for an exercise price of $17.64 per share, pursuant to the option plan that was approved at Delek USA at the time of its offering on the New York stock exchange in May 2006. At the end of each of the first four years after the allotment of the option, one quarter of the quantity of shares (7,000 shares) will be released and become exercisable, with the last exercise date being 10 years after the allocation of the option. Should Mr. Bartfeld’s tenure as an officer at Delek USA end, he will be entitled to exercise the portion of the option exercisable at that time, within a period of 180 days, and will not be entitled to exercise the balance of the option that has not yet vested. The economic value of the option that was allotted to Mr. Bartfeld amounted to approximately NIS 790,000. Delek USA included an expense in the amount of $47,000 (pretax) in its financial statements for 2009 with regard to the foregoing options, in accordance with their vesting terms.. The figure that appears in the table in new shekels was calculated based on the representative rate on the date of the financial position report (NIS 3.775). Subsequent to the global crisis and due to changes in the market conditions and the value of Delek USA shares, the foregoing options granted to Mr. Bartfeld become out of the money. In February 2006, Delek Real Estate decided to award to Mr. Bartfeld, who served then as Chairman of Delek Real Estate's board of directors, gratis, 926,262 options. These options expired in September 2009 due to the termination of Mr. Bartfeld's term as a director at Delek Real Estate. The options were out of the money and were not exercised before they expired, as aforesaid. In the framework of the establishment of Delek Capital in May 2006, Mr. Bartfeld holds 1% of the issued and paid-up share capital of Delek Capital. In November 2007 Mr. Bartfeld exercised an option and purchased 0.2% of the shares of IDE Technologies Ltd. (“IDE”) from the Company, in return for the sum of $800,000. It should be noted that Mr. Bartfeld serves as a director at IDE. The value of the benefit, according to an estimate by an independent appraiser (Giza Singer Even) that was performed in accordance with the accounting rules and is valid as at July 3, 2007, is $90,000 (taking the possibility of a future offering into consideration). Phantom options: In June 2009 the audit committee and the board of directors of the Company decided to award a total of 20,000 phantom options to Mr. Bartlet, under the phantom options plan for senior managers and officers. Based on the valuation received by the Company, the financial value of the phantom options granted to Mr. Bartfeld under the plan at December 31, 2009, is NIS 8.9 million. For further information pertaining to the phantom options plan and allocation see subsection (11) below. (8) Mr. Gabriel Last – is employed as Chairman of the board of directors of the Company since 2003. Mr. Last is entitled to a gross monthly salary of NIS 97,517, (linked to the CPI) and to an annual bonus as decided by the Company’s board of directors. The determining salary for the purpose of provisions to payments and benefits (hereinafter: “the Insured Salary”) is lower than the monthly and amounts to NIS 37,100 linked to the CPI for June 2001. Due to the

D-14 reduced provision for benefits and severance pay, the agreement stipulated that Mr. Last is entitled to a special increment equal to 13.33% of the difference between the monthly salary and the Insured Salary, and to a special increment equal to 2.5% of the monthly salary, as it shall be from time to time. It was also determined that the bonus will not be included in the salary for the purpose of provisions to social conditions. It is noted that Mr. Last is not entitled to a directors remuneration for his tenure as a director at the Company and/or at other companies that are part of the Delek Group. Apart from the foregoing, Mr. Last is entitled to convalescent pay, annual vacation days, sick leave, provisions to an in-service study fund, reimbursement of job-related expenses, a mobile phone and costs incurred in connection therewith, reimbursement of expenses for a landline, and a company car provided by the Company, which will bear the maintenance and operating costs thereof. Under the contract, each party may terminate the agreement with three months' advance notice to the other party. The Company may waive employment during the advance notice period and pay a salary for this period. In the event of termination of employment by the Company, Mr. Last is entitled to an acclimation bonus in the amount of six monthly salaries. Under special circumstances, the Company is granted the option of terminating the agreement immediately, without giving an acclimation bonus. The employment contract sets out provisions pertaining to the avoidance of conflict of interest, maintaining confidentiality, employee obligations towards the Company, etc. The total cost to the Company (Delek Investments) in respect to Mr. Last's salary and expenses (without the share-based payment) in the year 2009 amounted to the sum of NIS 1,715,000 (excluding the bonus for 2009, since the board of directors is yet to approve it). Loans: Over the years Mr. Last received several loans from the Company for the purpose of acquiring securities of companies belonging to the Delek Group. These loans are linked to the CPI and carry interest at a rate of 4% per annum. The total debt balance as at December 31, 2009 amounted to NIS 9,707,000. The due date of the loans is August 3, 2010 (loan principal, as stated, in the amount of NIS 4,400,000) and October 17, 2011 (loan principal in the amount of NIS 2,500,000). Allocation of securities: In December 2006, the general meeting of the Company approved the allotment of an option to Mr. Last to purchase 28,000 ordinary shares of Delek USA, in which he serves as a director, in return for an exercise price of $16 per share. In January 2007, Mr. Last was given the option to purchase ordinary shares of Delek USA, in which he serves as a director, pursuant to the option plan that was approved at Delek USA at the time of its offering on the New York stock exchange in May 2006. At the end of each of the first four years after the allotment of the option, one quarter of the quantity of shares (7,000 shares) will be released and become exercisable, with the last exercise date being 10 years after the allocation of the option. Should Mr. Last's tenure as an officer at Delek USA end, he will be entitled to exercise the portion of the option exercisable at that time, within a period of 180 days, and will not be entitled to exercise the balance of the option that has not yet vested. The financial value of the option that was allotted to Mr. Last amounted to approximately NIS 650,000. Delek USA included an expense in the amount of $39,000 (pretax) in its financial statements for 2009 with regard to the foregoing options, in accordance with their vesting terms. The figure that appears in the table in new shekels was calculated based on the representative rate of exchange on the date of the financial position report (NIS 3.775). Subsequent to the global crisis and due to changes in the market conditions and the value of Delek USA shares, the foregoing options granted to Mr. Last become out of the money. Mr. Last served as Chairman of the board of directors of Delek Energy from 2001 through January 31, 2010 and serves, as of February 1, 2010, as vice Chairman of the board of directors. While serving as chairman of the board of directors the audit committee of the board of directors of Delek Energy decided in August 2007 to approve awarding of options to Mr. Last. The allocation was approved by the general meeting of Delek Energy in October 2007. In accordance with the terms of the allocation, 55,345 options exercisable into ordinary shares of Delek Energy in five equal annual tranches were awarded to Mr. Last, gratis. The options are exercisable until the year 2012, with the possibility of shortening the vesting period of each tranche during the course of the relevant year if Delek Energy achieves the market value goals that were set in advance in the agreement. Should Mr. Last cease to serve as Chairman of the board of directors of Delek Energy, all the options that were transferred to him and whose exercise date has not yet arrived, will expire immediately. The shares that were allotted in the framework of the exercise of the options constitutes approximately 1.2% of Delek Energy’s share capital before the allotment, assuming all the convertible securities of Delek Energy are exercised. The exercise price varies between NIS 349.96 and NIS 425.37 per share, according to the vesting periods set. In addition, to finance the exercise price, Mr. Last is entitled to receive from Delek Energy a non-recourse loan, linked to the CPI and bearing 4% interest per annum. As at the reporting date, Delek Energy has not yet given the loans to Mr. Last. The loan will be secured solely by a first degree lien on the exercise shares. The entitlement to exercise the options will be spread out, beginning on the entitlement date (July 1, 2007), and will be exercisable until the end of one year from the

D-15 last vesting date. To date, the purchase terms of three of the five tranches awarded have been fulfilled. In March 2010, the general meeting of Delek Energy's shareholders, following the approval of the audit committee and the board of directors of Delek Energy, confirmed that in view of the changes in Mr. Last's position, as aforesaid, changes will be made to the terms of his option plan as follows: The fifth option tranche which vests as of July 2, 2012, will be cancelled, while the fourth option tranche which vests as at July 1, 2011 shall be waived under the current terms and shall vest so long as Mr. Last is still serving as chairman of the Company's board of directors (despite the condition in the option plan, according to which Mr. Last should be serving as chairman of the Company's board of directors), but not prior to his third cumulative year as chairman of the board and as vice chairman of the board. In view of the foregoing, the total number of options that will be awarded to Mr. Last is 44,276 options in place of 55,345 options as set in the options plan. The financial value of the options as at the date of the approval of the change in the terms of the allocation amounted to approximately NIS 39.6 million. Delek Energy included an expense in the sum of approximately NIS 1,353,000 (pretax) in its financial statements for 2009 in respect to the options as aforesaid, in accordance with the vesting terms thereof. (9) Ms Liora Pratt Levin – serves as a VP, legal counsel and Company secretary of the Company since 2007. Ms. Pratt Levin is entitled to a salary in the amount of NIS 55,000 linked to the CPI. Ms. Pratt Levin is also entitled to an annual bonus which is fixed at the discretion of the Company. She is also entitled to insurance under the Company's officers insurance policy, exemption of liability and indemnification arrangements as customary in the Company, as well as vacation pay, annual leave, sick leave, provisions for pension savings and study fund, mobile phone and company car. The Company also carries the costs of communications, car maintenance and operating costs and the landline telephone at Ms. Pratt Levin's home. The employment contract also includes Ms. Pratt Levin's undertaking to maintain confidentiality and non- competition during her employment at the Company and for three months after termination of her employment at the Company. Under the contract with Delek Investments dated June 2005, during the course of the year 2006, a loan in the amount of NIS 436,000 was available for Ms. Pratt Levin for the purpose of acquiring securities of companies belonging to the Delek Group. These loans are linked to the CPI and carry annual interest of 4%. Repayment date began on March 1, 2008 through March 1, 2011 and the borrower is entitled to make early payment in full or in part. Under the loan contract, the securities acquired were deposited as collateral against the repayment of the loan. It was determined that the borrow is entitled to sell the collateral provided that the proceeds for the sale will be transferred to Delek Investments to repay the loan balance. In addition, under the agreement of December 19, 2007, an additional loan was available to Ms. Pratt Levin, in the amount of NIS 596,000 which was repayable on December 18, 2018. The terms of the loan are identical to the foregoing loan, with required changes. On July 5, 2009, the Company decided to award Ms. Pratt Levin with phantom options, under the phantom potions plan for senior managers and officers. Based on the valuation received by the Company, the financial value of the phantom options granted to Ms Pratt Levin under the plan at December 31, 2009, is NIS 1.9 million. For further information pertaining to the phantom options plan and allocation to Ms. Pratt Levin, see subsection (11) below. It is noted that in 2006, Delek Real Estate options were awarded to Ms. Pratt Levin, while serving as a director of Delek Real Estate. These options were meant to expire in September 2009 due to the termination of her service as a director at Delek Real Estate. The options were out of the money and were not exercised before they expired as aforesaid. (10) Mr. Moshe Amit – serves as acting chairman of the board of directors of Delek Israel since 2004. Under the agreement between Mr. Amit and Delek Israel, Mr. Amit is entitled to a monthly fee, which currently amounts to NIS 65,758 (linked to the CPI). The agreement stipulates that the agreement will remain valid until terminated by one of the parties. The agreement may be terminated by Delek Israel with two months advance notice and Mr. Amit is entitled to terminate the agreement with one month advance notice. The agreement determines that upon termination, Mr. Amit shall resign, at the request of Delek Israel, his tenure as a member of the board of directors and any other position that he may hold as part of fulfilling his position under the agreement. Mr. Amit is also entitled to a company car, maintenance and expenses of the car, a mobile phone and reimbursement of expenses. Under the agreement Mr. Amit is not considered and shall not be considered as an employee of Delek Israel and the amount paid to Mr. Amit for his services as chairman of the board of directors at Delek Israel is set taking into consideration the fact that Delek Israel will not be obligated to pay and/or make a provision for Mr. Amit and/or for any payment for fringe benefits, vacation, sick leave, severance compensation, national insurance and any other payment of the kind that Delek Israel customarily pays and/or provides for its employees. The agreement includes provisions aimed at protecting the intellectual property of Delek Israel and a confidentiality clause.

D-16 In practice, Delek Israel pays Mr. Amit the foregoing monthly payment and receives reimbursement from the Company for the amounts owing to Mr. Amit for his role as a director of the Company. Furthermore, Delek Israel pays Mr. Amit bonuses, which in 2009 amounted to (for 2008) NIS 250,000. The said bonuses are set from time to time by the board of directors of Delek Israel, at its sole discretion. On December 26, 2007 Delek Israel awarded 109,483 options to Mr. Amit as part of the 2007 options plan for employees, officers and consultants of Delek Israel. For further information pertaining to the options plan, see the description of the Company's businesses in the third part, section 1.8.12D on page 89 of this report. (11) Phantom Options Plan – in June 2009 the Company's audit committee and board of directors decided to adopt a phantom options plan for senior employees and officers, under which phantom options were, inter alia, awarded to the Company's CEO and other officers. Under the terms of the plan, the options were awarded gratis and may be exercised for a monetary bonus and not securities of the Company. The options will vest in three equal annual tranches and the first tranche will vest one year after the date of approval of the allocation by the Company's board of directors or the date on which it is approved by the CEO of the Company, accordingly, as set forth in the plan. The exercise price of the phantom options is the share price on June 2, 2009, which was NIS 503.20 per share. The exercise price is not linked. The phantom options are subject to adjustment as set forth in the plan, in cases such as technical changes in the Company's equity, mergers and acquisitions, distribution of dividend and issuance of rights. The options will expire at the end of two years following the end of the vesting period for the last tranche that will be awarded to a participant at that time, so long as they have not expired prior thereto. The total number of phantom options that the Company will extend for exercise of the plan is 46,895 phantom options of which, as at the reporting date, 34,400 phantom options have been allocated. Based on the valuation received by the Company, the financial value of the total number of phantom options awarded under the plan as at December 31, 2009 amounts to NIS 15.4 million. It is noted that the foregoing calculation is theoretic since at the allocation date, the figures may be different. For further information pertaining to the phantom options plan and the allocation thereunder to the CEO, legal counsel (VP) and CFO of the Company see immediate reports of the Company dated June 11, 2009 (Ref. No. 2009-01-139182) and dated July 5, 2009 (Ref. No. 2009-01-161811).

Regulation 21 (B): Description of the payments that were given to the officers after the reporting year and before the date on which the report was submitted, in connection with their tenure or their employment during the reporting year. There have been no changes the remuneration of the senior officers as specified above, also for the period subsequent to the reporting year and prior to the date of issue of the report, unless explicitly noted otherwise.

Regulation 22: Transactions with the controlling shareholder 1. Agreement between Delek Investments and Roni Elroi: On December 30, 2004, Delek Investments entered into an agreement with Mr. Roni Elroi (the son-in- law of Mr. Yitzchak Sharon Tshuva, the controlling shareholder in the Company) and a company controlled by them )“Elroi”) stipulating the terms of tenure and employment of Elroi as deputy chairman of the board of directors of Delek Investments12. The period of the agreement is from January 1, 2005 for an unlimited period, as long as the agreement has not been brought to an end. Delek Investments is permitted to terminate the agreement with two months advance notice, and Elroi is permitted to terminate it with one month advance notice. In lieu of his services, Mr. Elroi is entitled to an amount of NIS 56,000 per month with the addition of VAT, linked to the CPI of December 2004. In addition, Mr. Elroi is entitled to reimbursement of expenses and all costs of a car (the car will be purchased by Mr. Elroi and will be his property). The agreement stipulates that Mr. Elroi shall be deemed an employee of Delek Investments and that he is not required to any provisions customarily paid for employees. 2. Agreement between Delek Motors and Rami Naor:

1 The agreement was approved by the Company's audit committee and board of directors. At the approval date, Section 270 (4) of the Companies Law is yet to determine that approval of the terms of service and employment of a relative of the controlling shareholder requires special approval pursuant to section 275 of the Companies Law. 2 The agreement was approved by the Company's audit committee and board of directors. At the approval date, Section 270 (4) of the Companies Law is yet to determine that approval of the terms of service and employment of a relative of the controlling shareholder requires special approval pursuant to section 275 of the Companies Law..

D-17 According to the agreement of October 4, 1994, which was extended on November 28, 2002 between Delek Automotive and Mr. Rami Naor (the son-in-law of Mr. Yitzhak Tshuva, the controlling shareholder of the Company) and / or R.D. Naor Management Services Ltd. (a company wholly controlled by Mr. Naor) ("Naor"), Mr. Rami Naor, deputy chairman of the board of directors of Delek Automotive, has made his services available to Delek Automotive in return for a monthly fee of NIS 17,000 gross, linked to the July 1999 CPI, and reimbursement of expenses incurred as part of his position at Delek Automotive. The agreement remains valid until terminated by one of the parties. Delek Automotive may terminate this agreement at any time with two months written notice. Rami Naor may terminate the agreement with one month written notice. The agreement was approved by the general meeting of the Delek Automotive shareholders in December 2002. 3. Gas station operating agreement with Mr. Avi Lalewski: Under the agreement between Delek Israel and Mr. Avi Lalewski, brother-in-law of the controlling shareholder in the Company, and Or-Li Energy Resources Ltd. (which to the best of the Company's knowledge, is a company controlled by Mr. Lalewski) ("Or-Li"), Or-Li operates a gas station in Givat Olga belonging to the Delek Israel chain. The agreement includes the customary terms and conditions for this type of agreement. The agreement became effective on March 21, 1999 for a period of two years and was extended at the discretion of Delek Israel for additional two-year periods (or less), and no longer than a total of six years. As at the reporting date, Or-Li continues to operate the station, after the termination of the agreement period. Delek Israel is conducting negotiations with Or-Li Energy Resources Ltd. to sign a new agreement at the customary market terms for other Delek Israel operators. 4. Agreement with Mr. Elad Sharon (Tshuva): On January 13, 2010, the general meeting of the Company's shareholders approved the agreement with Mr. Elad Sharon (Tshuva), the son of the controlling shareholder in the Company. Under the terms of the agreement, Mr. Elad Sharon (Tshuva) will be entitled directors fees in amounts equivalent to the maximum annual remuneration and the maximum participation fee for an external director, in accordance with the Reimbursement Regulations, based on the ranking in which the Company is classified in each fiscal year. Furthermore, Mr. Sharon will be entitled to reimbursement of various expenses. For further information pertaining to the agreement, see the immediate report issued by the Company on November 30, 2009 (Ref. No. 20096-01-304638). 5. Transactions with Delek Real Estate: Delek Real Estate was a subsidiary of the Company until the majority of its shares held by the Company were distributed as dividend in kind on May 3, 2009. Since the controlling shareholder of the Company is the controlling shareholder of Delek Real Estate, subsequent to the distribution of its shares as dividend in kind, below is a breakdown of the contracts signed between the Company and its subsidiaries and affiliates with Delek Real Estate subsequent to the distribution in kind or contracts signed as aforesaid prior to the distribution in kind and which are still valid as at the reporting date: A. Loan for NCP transaction – On November 3, 2002 the Company extended a loan to Delek Real Estate, when Delek Real Estate was a subsidiary of the Company, in the amount of NIS 160 million for the NCP transaction (acquisition of a company holding parking lots in the UK) ("the NCP Loan"). The final repayment installment of the interest and the principal of the NCP loan was meant to be on June 7, 2009, however this installment was not paid. On July 12, 2009, the Company's general meeting approved the extension of the NCP loan until December 31, 2010. For further information pertaining to the loan and its extension, see immediate report issued by the Company on June 4, 2009 (Ref. No. 2009-01-133929) and the amendment to it issued on June 11, 2009 (Ref. No. 2009-01-139833). B. Roadchef loan – as part of rescheduling of the financing of the Roadchef transaction (acquisition of the share capital of a foreign company, which owns on its own and by way of its subsidiaries 29 motorway service areas in the UK, by Delek Israel (25%) and Delek Belron (75%)), in September 2008 the Company extended two loans to Delek Real Estate, when Delek Real Estate was a subsidiary of the Company, (" the Roadchef Loans): 1. On September 15, 2008 the Company provided a loan in the amount of NIS 80 million to Delek Real Estate for a period of 12 months; 2. on September 25, 2008 the Company provided an additional loan in the amount of NIS 200 million for a period of 13 months. For providing the Roadchef loans the Company received various securities of Delek Real Estate. On July 12, 2009 the general meeting of the Company's shareholders approved the extension of the term of the Roadchef loans, under similar terms, until December 31, 2010 or until the sale of the rights in Roadchef, the earlier of the two, with the exception of the interest on the loans, which will be paid in six-monthly installments at 9.5% (annual interest) as of the date of the approval of extension of the loans through the new

D-18 repayment date. On December 31, 2010 an additional 1.2% interest will be paid on the loan for the period from July 12, 2009 until the registration of the Adar House mortgage, or until the outstanding NCP loan is repaid in full, the earlier of the two. For further information pertaining to the loans and their extensions, see the Company's immediate report of June 4, 2009 (Reference No. 2009-01-133929), and the amendment to it issued on June 11, 2009 (Ref. No. 2009-01- 139833). The Company's agreements with banks – it is noted that as part of the agreements of March 26, 2009 with the bank in favor of which Delek Real Estate's shares were attached for the purpose of carrying out the distribution of the Delek Real Estate shares as dividend in kind, the Company undertook, inter alia, vis-à-vis the bank, that on the dates on which Delek Real Estate pays to the Company an amount on account of the loans provided by the Company to Delek Real Estate for Roadchef (principal of NIS 280 million), the Company will acquire from the bank for the entire amount received in payment part of the rights in the debt that Delek Real Estate has with the bank in the amount of the amount that is paid, up to an accrued amount of NIS 150 million. For further information pertaining to the agreements with the bank see section 1.18.6 of the Part 4, the chapter on the description of the Company's businesses, in this report. C. The Phoenix Loans – according to the loan agreement of July 8, 2004, Phoenix Insurance provided Delek Real Estate with a loan in the amount of NIS 132,298,000 and according to the loan agreement of November 28, 2004 Phoenix Insurance provided Delek Real Estate with a loan in the amount of NIS 16,700,000. These two loans were used for the purpose of acquiring all of the shares in Dankner Investments Ltd. ("the Dankner Loans"). At the date of the signing of the Dankner loans agreements, Phoenix was not in the Company's control. On September 21, 2005 Delek Real Estate signed an agreement together with its subsidiary for a loan framework with Phoenix Insurance. At the date of the signing of the framework agreement, Phoenix was not in the Company's control. Under the framework agreement, Phoenix and Phoenix Insurance provided Delek Real Estate with a credit facility in the amount of NIS 75 million against the payment of quarterly commitment commissions. On August 20, 2008, a loan agreement was signed between Phoenix Insurance and Phoenix and Delek Real Estate according to which, subject to conditions set out in the framework agreement, the lender would provide a loan to the Company in the amount of NIS 75 million (" the 2008 Loan"). To guarantee the fulfillment of all Delek Real Estate's liabilities under the 2008 loan and to secure the fulfillment of the Company's commitments under the Dankner loans and in accordance with the loan agreement Delek Real Estate provided various collateral in favor of the lender. On November 4 2009, the general meeting of Phoenix shareholders and the general meeting of Delek Real Estate approved deferral of the repayment of the principal and the interest on the Dankner loans and the 2008 loan. Within the framework of the changes to the loan terms, Phoenix approved Delek Real Estate rescheduling the installments that were to be paid in August 2009 until January 1, 2010, and it was resolved that Phoenix will not be entitled to call the loans for immediate repayment in the event that Delek Real Estate does not comply with the financial terms fixed in the loan agreements or in the event that the ratings awarded by S&P Maalot for the debentures issued by Delek Real Estate decrease to BBB Plus or lower ("the Financial Terms and the Ratings"). In return for the foregoing rescheduling and cancellation of the financial terms and ratings: 1) Delek Real Estate will bring forward expected payments set in the terms of the loans so that Delek Real Estate will repay amounts totaling NIS 170 million by January 1, 2011 in order that the balance of the loans after said payments will total NIS 65 million plus interest and linkage); 2) Additional interest (annual interest) of 2.5% was set, which will be added to the interest borne by the loans; 3) Phoenix will receive additional collateral that will include shares held by Delek Real Estate in Vitania Ltd. and the rights held by Delek Real Estate's subsidiary in the plot in Raanana, which is intended for the construction of a shopping center, and the plot in Kfar Saba. The Vitania shares will be released following payment of installments on account of the loans in the total amount of NIS 170 million (in other words, when the balance of the loans will be NIS 65 million plus interest and linkage). The lien on the plots will not be released until the final repayment of the loans. In addition, as part of the foregoing, amendments will be made to the provisions of the loan agreements pertaining to the level and release of the shareholders' loans extended by Delek Real Estate, which were extended by the Company to its subsidiary Delek Real Estate Profitable Properties Ltd., part of which are mortgaged to Phoenix. D. Collateral – the Company guaranteed part of the liabilities of Delek Real Estate and its subsidiaries to banks. As at December 31, 2009, Delek Real Estate's debts and the debts of its subsidiaries which are secured with the Company's guarantee amounted to NIS 59 million (of the said amount, as at the signing of the report, the bank agreed to erase a guarantee in the amount of NIS 28 million, however written confirmation has not yet been received from the bank). On May

D-19 30, 2005 an agreement was signed between Delek Real Estate and the Company according to which Delek Real Estate will pay the Group commissions for the guarantees provided by it until the date of the signing of the agreement: (1) annual commission equivalent to 1.5% of Delek Real Estate's debt balances to the financial institutions covered by the Company's guarantee and no more than NIS 157,000,000; (2) annual interest equivalent to 1.25% of the balance of Belron's liabilities vis-a-vis debenture holders covered by Delek Group guarantees. For the foregoing guarantees Delek Real Estate paid the Company in 2009 an amount of NIS 1,567,000. E. Delek Real Estate and Phoenix acquisition of loans from a bank – on July 8, 2008 the transaction was concluded to acquire three parts of a loan from an international bank, given to Delek Belron (a subsidiary of Delek Real Estate) and Phoenix Insurance, in an overall amount of EUR 80.07 million, which is backed by 30 profit yielding real estate properties located in Germany and Switzerland. The acquisition of the loans was carried out through a foreign consultancy company (SPC) that was established and whose share capital and voting rights were held, in equal share, by Delek Belron and Phoenix Insurance. A collaboration agreement was signed between Delek Belron and Phoenix Insurance defining the rights of the parties in the foreign subsidiary and the nature of the collaboration between them concerning the loans. The total consideration that the foreign subsidiary paid for the transaction to acquire the loans amounts to EUR 58 million. F. Acquisition of plot and establishment of project by Vitania and DMR Properties – under the agreement signed on January 28, 2008 between Vitania Ltd. (a holdings company in which Delek Real Estate holds 48%) and DMR Properties (1995) Ltd. (a company wholly owned by Delek Automotive) and a third party which is a company in voluntary liquidation, DMR Properties and Vitania acquired the ownership rights in a 5-dunam plot in Tel Aviv (the “First Plot”) for NIS 64 million in equal shares and under the same terms (50% each party). The First Plot is designated for industry, high-tech industries and offices. On February 6, 2008, DMR Properties and Vitania entered into an agreement to establish a profit-yielding property on the First Plot and on an adjacent plot, if acquired. In addition, on 6 February, 2008, DMR Properties and Vitania signed a loan agreement according to which DMR Properties undertook to grant Vitania a loan of NIS 32 million to finance the acquisition of Vitania’s share in the First Plot The Loan was given to Vitania on November 19, 2008. On May 26, 2008, the general meeting of the shareholders of DMR approved the aforesaid agreements, in accordance with the provisions of section 275 of the Companies Law. For further information pertaining to Delek Automotive's contract with Delek Real Estate in the foregoing agreement, see the description of the Company's businesses in the third part, section 1.11.7D on page 152-A of this report. G. Delek Retail Areas – on November 2, 2004 a founders contract was signed between Delek Israel and Delek Real Estate (when both companies were private companies) in which the parties arranged the collaboration between them in the establishment and management of Delek Retail Areas Ltd. ("DRA"), which is equally and jointly owned by both companies, operating to locate land for the establishment of real estate ventures that include gas stations and commercial centers. At March 28, 2010, DRA acquired fourteen plots on which it intends to act as aforesaid (two of them had existing active gas stations and commercial centers at the time of acquisition, four additional stations have stated to operate as at the reporting date, and eight plots are currently in planning stages). Pursuant to the new agreement between Delek Israel and Delek Real Estate, Delek Israel will acquire from Delek Real Estate all Delek Real Estate's shares in DRA for consideration of NIS 4.6 million. On the date of the acquisition, DRA will repay a shareholders' loan for Delek Real Estate in the amount of NIS 1.6 million. The said agreement was approved by the audit committee and the board of directors of Delek Israel in their meetings held on January 21, 2010 and by the general meeting of Delek Israel's shareholders on March 15, 2015, in accordance with section 275 of the Companies Law. As of the reporting date, the said transaction has not yet been completed. H. Nir Zvi Partnership – On July 1, 2004 Delek Israel signed an agreement with DMR Properties (1995) Ltd. (a wholly owned subsidiary of Delek Automotive) and Delek Real Estate to establish a partnership known as Delek – Nir Zvi, for the purpose of acquiring 50% (in partnership) of the leasing rights in a plot adjacent to the plot on which Delek Automotive's logistics center was built, in order to allow easy access to the said logistics center. The shares of the partners in the aforesaid partnership at the time of establishment were Delek Real Estate (25%), DMR Properties (50%), and Delek Israel (25%). The leasing rights were acquired under an agreement signed on September 29, 2003 between the Nir Zvi Partnership (in establishment) and the Middle East Tube Company Ltd. In January 2010, DMR Properties bought Delek Real Estate's share in the partnership after Delek Real Estate announced that it wished to leave the partnership and reclaim its investment. After completing the transfer of Delek Real Estate shares in the partnership to DMR Properties, DMR Properties will hold 75% of the rights in the partnership. For

D-20 further information pertaining to Delek Automotive and Delek Israel's contract with Delek Real Estate, see the description of the Company's businesses in the third part, section 1.11.12 on page 158-A of this report. I. Renting of gas stations to Delek Israel – (1) on December 12, 2000 Delek Israel signed an agreement with Delek Real Estate according to which Delek Real Estate undertook, under certain contingent conditions, to initiate, plan and establish power centers, and among them 5 gas stations, at Kfar Netter, Mishmar Hashiva, Moshav Ben Ami, Lavi industrial zone (Biranit) and Ashkelon (Esther Cinema), and to rent them the Delek Israel for operating them. Since building permits were not received, Delek Israel announced on March 5, 2007, the cancelation of the agreement with regard to Mishmar Hashiva, Kfar Netter and Moshav Ben Ami. In practice gas stations were established at Biranit and Esther Cinema, while it is noted, the Biranit station is not operating. (2) Delek Real Estate and its subsidiaries rented and still rent 7 gas stations and areas to Delek Israel. In 2009, 2 gas stations were sold (as set forth in subsection J below), so that to date there are 5 rented gas stations left. Delek Real Estate's share in the rent paid in 2009 amounted to NIS 3,285,000. Shortly prior to the reporting date, the agreement to sell the additional three stations was approved (as set forth in subsection K below). J. Acquisition of gas stations by Delek Israel - (1) in May 2009, Delek Israel acquired from Delek Real Estate, a gas station located in Jerusalem (which until the acquisition date was rented to Delek Israel by Delek Real Estate) for NIS 17 million. On May 18, 2009 the audit committee and board of directors of Delek Israel approved the foregoing acquisition as a regular transaction. (2) in May 2009, Delek Israel acquired from Delek Real Estate, a gas station located in Rishon Lezion (which until the acquisition date was rented to Delek Israel by Delek Real Estate) for NIS 41.6 million. On December 30, 2008 the audit committee and board of directors of Delek Israel approved the foregoing acquisition, pursuant with section 1(5) of the Companies Regulations (Relief for Transactions with Interested Parties), 5760-2000 ("the Relief Regulations"). K. Agreements between Delek Israel and Delek Real Estate – Delek Israel signed three agreements with Delek Real Estate and its subsidiaries to acquire their rights in companies owning 3 gas stations. Furthermore, Delek Israel signed another agreement to acquire the rights of Delek Real Estate in DRA as set forth in subsection G above. In addition, the Company signed an agreement with Delek Real Estate to purchase a block of land adjacent to a Delek Israel chain gas station. The said agreement was approved on January 21, 2010 by the audit committee and the board of directors of Delek Israel and on March 15, 2015 by the general meeting of Delek Israel's shareholders. If the foregoing transactions will be completed, ownership rights in 3 gas stations will be transferred to Delek Israel, pursuant to section 275 of the Companies Law. 6. Negligible transactions: Apart from the transactions set out above, Delek Real Estate has additional agreements with the Group's companies, which are classified as negligible transactions as defined in section 18 of the board of directors report, such as rental transactions for gas station, land for building gas stations and space in Delek Real Estate's commercial centers for Delek Israel, Delek Israel's acquisition of gas stations owned by Delek Real Estate, providing Delek Israel's Dalkan services to Delek Real Estate, Delek Real Estate's purchase of a car from a subsidiary of Delek Automotive, rental of space at Adar House from a Delek Real Estate holding company and two other partners, and insurance purchased by Delek Real Estate from Phoenix. Furthermore, there are other agreements between companies controlled by the Company and private companies owned by the Company's controlling shareholder and his relatives, such as Delek Israel's Dalkan services, insurance policies prepared by Phoenix and purchase of cars from Delek Automotive's subsidiaries. These agreements are also classified as negligible transactions as they are defined in section 18 of the board of directors report. 7. Holdings in debentures of companies controlled by the controlling shareholder: For the sake of caution, it is noted that, as at December 31, 2009, holdings in provident funds, pension funds, profit-sharing policies ("Peer Assets"), Phoenix and Excellence trust and nostro funds, debentures of companies controlled by the controlling shareholder are as follows:

Peer assets held NIS 78 million par value debentures of Delek Real Estate and the Phoenix nostro account held NIS 3 million par value debentures of Delek Real Estate. Excellence trust funds and ETFs held NIS 50 million par value debentures of Delek Real Estate. Excellence provident funds held NIS 5 par value debentures.

D-21 Insurance peer assets held NIS 65 million par value debentures of Elad Fluride and Elad Group, private companies owned by the Company's controlling shareholder. In addition, peer assets held NIS 97 million par value debentures of Elad Canada and in nostro NIS 42 million par value. Excellence provident funds held NIS 35 million, NIS 66,000 and 1,513,000 par value debentures of April, Elad Group and Elad US, respectively, private companies owned by the Company's controlling shareholder.

D-22 Regulation 24: Shares and convertible securities of the Company, held by interested parties in the Company, in the Company itself, in its subsidiaries and its affilliates, as at March 22, 2010 Holdings of interested parties and executive officers in the Company:

Yitzchak Sharon 043480003 Delek Group Ltd. 1084128 7,338,543 64.51% 63.06% 64.63% 63.19% (Tshuva) *

Gabriel Last 4787933 Delek Group Ltd. 1084128 6,760 0.06% 0.06% 0.06% 0.06%

Asi Bartfeld 65474108 Delek Group Ltd. 1084128 4,903 0.05% 0.05% 0.05% 0.05% Excellence 520041989 Delek Group Ltd. 1084128 160,919 1.43% 1.39% Investments Ltd.** 1.43% 1.39% Phoenix Insurance 0% 0% 0% 0% 520023185 Delek Group Ltd. 1084128 644 Company Ltd. Manor Holdings B.I. 5.08% 4.97% 512843855 Delek Group Ltd. 1084128 577,980 5.09% 4.97% Ltd.*** Elad Sharon 37336997 Delek Group Ltd. 1084128 0 0% 0% 0% 0% Delek Group Ltd. Delek Group Ltd.**** 520044322 1084128 346,407 0% 0% 0% 0% Dormant shares Delek Investments and Delek Group Ltd. 520032129 1084128 22,462 0.20% 0.20% 0.20% 0.20% Properties Ltd.**** Dormant shares

Liora Pratt Levin 57906919 Delek Group Ltd. 1084128 1,017 0% 0% 0% 0%

Michael Greenberg 069108231 Delek Group Ltd. 1084128 96 0% 0% 0% 0%

Gideon Tadmor 057995755 Delek Group Ltd. 1084128 179 0% 0% 0% 0% * The shares are held through wholly-owned companies (100%) of Mr. Yitzchak Sharon (Tshuva) ** The holdings include holdings in a nostro account, provident funds and trust funds *** Manor Holdings B.I. Ltd. is an interested party in the Company by virtue of its holdings, through subsidiaries and affiliates of Manor Holdings, in more than 5% of the voting rights in the Company. The holdings include holdings in a nostro account, provident funds and trust funds **** Dormant shares

D-23 Holdings of interested parties and senior officers of the Company in securities of Delek Automotive, a subsidiary of the Company:

Company No. in Percentage of Name of interested the Registrar of No. of security Par value held % Holding in % in voting voting rights party Companies/ ID Name of security on the TASE on 22.3.2010 % in capital capital, diluted rights (fully diluted) Delek Investments and 54.83% 54.83% 54.83% 520032129 Delek Automotive 829010 49,942,280 54.83% Properties Gil Agmon 57061822 Delek Automotive 829010 14,923,746 16.38% 15.99% 16.38% 15.99% Gabi Last 4787933 Delek Automotive 829010 70,000 0.07% 0.07% 0.07% 0.07% Asi Bartfeld 65474108 Delek Automotive 829010 113,149 0.12% 0.12% 0.12% 0.12% Excellence 520041989 Delek Automotive 1.09% 1.09% 829010 1,021,404 1.13% 1.13% Investments Phoenix Insurance 520023185 Delek Automotive 0% 0% 0% 829010 3,317 0% Company

D-24 Holdings of interested parties and senior officers of the Company in securities of Gadot Biochemical Industries, a subsidiary of the Company:

Company No. in Percentage of Name of interested the Registrar of No. of security Par value held % Holding in % in voting voting rights party Companies/ ID Name of security on the TASE on 22.3.2010 % in capital capital, diluted rights (fully diluted) Delek Group 520044322 Gadot 1093004 7,200,000 64.11% 61.30% 64.11% 61.30% Gabi Last 4787933 Gadot 1093004 13,560 0.12% 0.12% 0.12% 0.12% Asi Bartfeld 65474108 Gadot 1093004 100,000 0.89% 0.85% 0.89% 0.85%

Holdings of interested parties and senior officers of the Company in securities of Phoenix Holdings, a subsidiary of the Company:

Company No. in Percentage of Name of interested the Registrar of No. of security Par value held % Holding in % in voting voting rights party Companies/ ID Name of security on the TASE on 22.3.2010 % in capital capital, diluted rights (fully diluted) Delek Investments and 520032129 Phoenix 1 767012 59,213,577 28.65% 27% 27.09% 25.40% Properties Phoenix 5 767038 2,355,663 Asi Bartfeld 65474108 Phoenix 1 767012 135,867 0.05% 0.05% 0.06% 0.06% Elad Sharon 37336997 Phoenix 1 767012 999,686 0.40% 0.38% 0.44% 0.41% Eyal Lapidot 022030159 F 08/09 7670144 6,177,879 0 2.33% 0 2.55% Excellence 520041989 767012 1.49% 0.05% Phoenix 1 3,880,332 1.58% 0.04% Investments Phoenix Insurance 520023185 767012 0% 0% 0% Phoenix 1 7,542 0% Company

D-25 Holdings of interested parties and senior officers of the Company in securities of Delek Energy, a subsidiary of the Company:

Company No. in Percentage of Name of interested the Registrar of No. of security Par value held % Holding in % in voting voting rights party Companies/ ID Name of security on the TASE on 22.3.2010 % in capital capital, diluted rights (fully diluted) Delek Investments and 520032129 Delek Energy 565010 3,990,702 79.72% 74.65% 79.72% 74.65% Properties Gabi Last 4787933 Delek Energy 08/07 5650072 44,276 0 0.83% 0 0.83% Gideon Tadmor 057995755 Delek Energy 565010 4,219 0.08% 0.08% 0.08% 0.08% Gideon Tadmor 057995755 Delek Energy 08/07 5650072 258,265 0 4.85% 0 4.85% Liora Pratt Levin 57906919 Delek Energy 565010 315 0 0 0 0 Excellence 520041989 565010 Delek Energy 40,298 0.80% 0.80% 0.80% 0.80% Investments Phoenix Insurance 520023185 565010 Delek Energy 13,611 0.18% 0.18% 0.18% 0.18% Company

Holdings of interested parties and senior officers of the Company in securities of Delek Israel, a subsidiary of the Company:

Company No. in Percentage of Name of interested the Registrar of No. of security Par value held % Holding in % in voting voting rights party Companies/ ID Name of security on the TASE on 22.3.2010 % in capital capital, diluted rights (fully diluted) Delek Group 520044322 Delek Israel 6360044 8,761,774 77.4% 70.5% 77.4% 70.5% Eyal Lapidot 022030159 Delek Israel 11/07 6360085 48,659 0% 0.42% 0% 0.42% Moshe Amit 1127885 Delek Israel 11/07 6360085 109,483 0% 0.88% 0% 0.88% Excellence 520041989 Delek Israel 6360044 0.71% 0.71% 89,494 0.78% 0.78% Investments Phoenix Insurance 520023185 Delek Israel 6360044 1.67% 1.67% 209,846 1.85% 1.85% Company Manor Holdings 512843855 Delek Israel 6360044 676,716 5.43% 5.31% 5.43% 5.31%

D-26 Holdings of interested parties and senior officers of the Company in participating units of Delek Drilling, a subsidiary of the Company:

Company No. in Percentage of Name of interested the Registrar of No. of security Par value held % Holding in % in voting voting rights party Companies/ ID Name of security on the TASE on 22.3.2010 % in capital capital, diluted rights (fully diluted) Delek Investments and 520032129 Delek Drilling 475020 38,037,920 6.88% 6.88% 6.88% 6.88% Properties Participating Units Elad Sharon Delek Drilling 37336997 475020 881,209 0.16% 0.16% 0.16% 0.16% Participating Units Excellence Delek Drilling 520041989 475020 6,729,267 1.23% 1.23% 1.23% 1.23% Investments Participating Units Phoenix Insurance Delek Drilling 520023185 475020 26,353 0% 0% 0% 0% Company Participating Units

Holdings of interested parties and senior officers of the Company in participating units of Avner Oil Exploration, a subsidiary of the Company:

Company No. in Percentage of Name of interested the Registrar of No. of security Par value held % Holding in % in voting voting rights party Companies/ ID Name of security on the TASE on 22.3.2010 % in capital capital, diluted rights (fully diluted) Delek Investments and 520032129 Avner Participating 268011 442,175,480 13.25% 13.25% 13.25% 13.25% Properties Units Avner Participating Gideon Tadmor 057995755 268011 1,896,787 0.06% 0.06% 0.06% 0.06% Units« Excellence Avner Participating 520041989 268011 48,103,253 1.44% 1.44% 1.44% 1.44% Investments Units« Phoenix Insurance Avner Participating 520023185 268011 27,019,578 0.81% 0.81% 0.81% 0.81% Company Units«

D-27 Holdings of interested parties and senior officers of the Company in securities of Delek USA, a subsidiary of the Company:

Company No. in Percentage of Name of interested the Registrar of No. of security Par value held % Holding in % in voting voting rights party Companies/ ID Name of security on the TASE on 22.3.2010 % in capital capital, diluted rights (fully diluted) Zvika Grinfeld 004289070 Options - 117,000 -- - - - Asi Bartfeld 65474108 Ordinary shares - 16,935 -- - - - Eyal Lapidot 022030159 Ordinary shares - 3,200 -- - - - Gabi Last 4787933 Ordinary shares - 6,500 -- - - -

Holdings of interested parties and senior officers of the Company in securities of IDE Holdings, a subsidiary of the Company:

Company No. in Percentage of Name of interested the Registrar of No. of security Par value held % Holding in % in voting voting rights party Companies/ ID Name of security on the TASE on 22.3.2010 % in capital capital, diluted rights (fully diluted) Avshalom Halevi 058370412 Ordinary shares - 31,943 - - - - Felber Asi Bartfeld 65474108 Ordinary shares - 2,451 - - - -

D-28 [Regulation 24 A: Registered and issued capital, and convertible securities Data as at December 31, 2008:

Capital: Registered capital Issued and outstanding capital Par value Par value Ordinary shares of NIS 1 par value each 15,000,000 11,723,669 Dormant shares 346,407

Convertible securities Par value - Option warrants – Series 6 260,000

Data as at December 31, 2009:

Capital: Registered capital Issued and outstanding capital Par value Par value Ordinary shares of NIS 1 par value each 15,000,000 11,690,253 Dormant shares -346,407

Convertible securities Par value

Option warrants – Series 5 33,560 Option warrants – Series 6 260,000

Regulation 25A: Registered address Address: 7 Giborei Israel St., Netanya Tel: 09-8638444 Fax: 09-8854955 Email: [email protected] Website: www.delek-group.com

Regulation 26: Directors of the corporation Attached herewith are the details of the Company’s directors Regulation 26A: Additional senior officers in the corporation Attached herewith are details of the senior officers in the Company.

Regulation 26B: Independent authorized signatories: The Company has no independent authorized signatories.

Regulation 27: The corporation's accountants Kost Forer Gabbay & Kasierer– 3 Aminadav St., Tel-Aviv 67067

Regulation 28: Changes in the Company’s memorandum or articles of association During the reported year, there were no changes to the Company’s memorandum or articles of association.

Regulation 29: Recommendations and decisions of the board of directors

Regulation 29A (1) The board of director’s decision concerning distribution of a dividend

D-29 Decisions of the board of directors pertaining to the distribution of a cash dividend:

Date of Amount of Effective date Payment resolution Dividend in NIS Amount per share for payment date

28.12.2009 149,999,676 NIS 13.2230 06.01.2010 18.01.2010

30.11.2009 32,897,153.4 NIS 2.90000 21.12.2009 05.01.2010

30.08.2009 104,930,576 NIS 9.2500 09.09.2009 24.09.2009

27.05.2009 72,000,000 NIS 6.3472 17.06.2009 02.07.2009

Decisions of the board of directors pertaining to the distribution of a dividend in kind: On March 31, 2009 the board of directors resolved as follows: To distribute the majority of Delek Real Estate shares held by the Company as a dividend in kind (8.8 Delek Real Estate shares per NIS 1 par value share of the Company) to all shareholders registered in the Company's books on April 19, 2009. The dividend was paid on May 3, 2009.

Regulation 29 C - Resolutions adopted at an extraordinary general meeting (EGM) On January 1, 2009 the Company’s EGM adopted the following resolutions: 1. To appoint Mr. Yoseph Dauber as an external director in the Company for a period of 3 years, commencing January 1, 2009 2. To approve payment of remuneration to the external director candidate in the amount of the compensation for an expert external director under the Companies Regulations (Rules Regarding Compensation and Expenses of an External Director) 5760 – 2000. Particulars concerning the foregoing extraordinary general meeting are included in the immediate reports issued by the Company on November 25, 2008 and on January 1, 2009. On February 17, 2009 the Company’s EGM adopted the following resolution: To approve Delek Europe signing an agreement with Mr. Avi Harel, through a company in his control, for providing of management services, including eligibility for a bonus (phantom), in accordance with the terms set forth in the immediate report issued by the Company on January 22, 2009. It is noted that Mr. Harel terminated his service with Delek Europe on August 10, 2009. Particulars of this EGM are included in the Company’s immediate reports issued on January 29, 2009 and February 17, 2009. On July 12, 2009 the Company’s EGM adopted the following resolutions: To approve the extension of the NCP loans and the Roadchef loans granted to Delek Real Estate, as set forth in Regulation 22 above. Particulars pertaining to the foregoing EGM are included in the immediate reports issued by the Company on June 4, 2009 (Ref. No. 2009-01-133929), June 11, 2009 (Ref. No. 2009-01-139833), July 12, 2009 (Ref. No. 2009-01-167208) and September 8, 2009 (Ref. No. 2009-01-226635). On October 13, 2009 the Company’s EGM adopted the following resolutions: 1. To appoint Mr. Zion Zilberberg as an external director in the Company for a period of 3 years commencing from the date of end of his first term (May 29, 2009) and to approve the resolution of the audit committee and board of directors from the end of his first term of office, as set forth in the immediate report issued by the Company on September 7, 2009 (Ref. No. 2009-01-225873).

D-30 2. To approve fixing of remuneration for the external director candidate in the maximum amount for an expert external director under the Companies Regulations (Rules Regarding Compensation and Expenses of an External Director) 5760 – 2000. Particulars pertaining to the foregoing EGM are included in the immediate reports issued by the Company on September 7, 2009 (Ref. No. 2009-01-225873), and October 13, 2009 (Ref. No. 2009-01-253521). On November 24, 2009 the Company’s EGM adopted the following resolutions: 1. To approve directors insurance for the Company and its subsidiaries under a collective officers liability insurance policy for the Company and its subsidiaries under the terms set forth in the immediate report issued by the Company on October 29, 2009 (Ref. No. 2009-01-269370) ("the Immediate Report"). 2. To approve the Company purchasing officers liability insurance policies from time to time, without requiring additional approval of the general meeting, under the conditions set forth in the immediate report. Particulars pertaining to the foregoing EGM are included in the immediate reports issued by the Company on October 29, 2009 (Ref. No. 2009-01-269370), and November 24, 2009 (Ref. No. 2009-01-294630). On January 13, 2010 the Company’s EGM adopted the following resolutions: To approve the agreement with Mr. Elad Sharon (Tshuva), the son of the controlling shareholder, as set out in Regulation 22 above. Particulars pertaining to the foregoing EGM are included in the immediate reports issued by the Company on November 30, 2009 (Ref. No. 2009-01-304638), (2009-01-304638) and on January 13, 2010 (Ref. No. 2009-01-353700).

Regulation 29A (4): Exemption from insurance and indemnity for officers – valid at the date of the report: 1. Pursuant to the previous resolutions of the Company (adopted prior to 2009), the Company decided to grant senior officers an exemption regarding their liability for damages as a result of a breach of their fiduciary duty towards the Company, as set forth in the third section of the sixth part of the Companies Law and to indemnify them (according to and subject to the amendment adopted at the Company's EGM prior to 2009). The letter of indemnification complies with Amendment 3 of the Companies Law 5759-1999 and the Company's articles of association. Pursuant to the letter of indemnification, as the Company's articles of association include a provision allowing it to undertake in advance to indemnify an officer, provided the undertaking is restricted to the types of events that the board of directors anticipate in view of the Company’s actual actions at the time of undertaking to indemnify, in an amount or scope determined by the board of directors to be reasonable under the circumstances, all on account of any liability or expenditure that shall be authorized at that time according to the law at the time the resolution is adopted, the company also undertakes to indemnify the officer for reasonable litigation expenses, including attorneys' fees, such that may be incurred as a result of an investigation or proceedings that shall take place against the officer by any authority certified to launch an investigation or proceeding and that has ended without filing charges against the officer and without a fine being imposed in lieu of criminal proceedings or that has ended without an indictment being filed against the officer, while imposing a fine in lieu of criminal proceedings in a felony that does not warrant the proof of criminal intent. 2. Furthermore, pursuant to previous resolutions of the Company’s institutions (made prior to 2009), the Company insures its officers with executive insurance, as part of the group insurance for the Company’s subsidiaries as well. 3. On October 29, 2009 the Company's audit committee and board of directors resolved to approve the Company contracting with Menora Mivtachim Insurance Co. Ltd. in a collective directors and officers liability insurance policy for the Company and the majority of its subsidiaries, for a period of one year until November 30, 2009 as well as with approval for the Company to extend and/or renew the officers liability insurance policy as aforesaid or to replace it from time to time and without requiring further approval of the general meeting, in accordance with the conditions fixed in the resolution. The foregoing was also approved with regard to Mr. Elad Sharon (Tshuva), the son of the controlling shareholder in the Company,

D-31 pursuant with regulation 1B(5) of the Companies Regulations (Relief for Transactions with Interested Parties), 5760-2000 ("the Relief Regulation"). For further information pertaining to the resolutions see immediate report dated October 29, 2009 (Ref. No. 2009-01-269328). 4. Subsequent to the reporting period, on March 24, 2010, the Company's audit committee and board of directors resolved as follows, subject to the approval of the general meeting, which will be called shortly following the adoption of the resolution: A. To approve contracting with Phoenix Insurance Co. Ltd. to insure the officers of the Company and its subsidiaries under a collective officers liability insurance policy for the Company and its subsidiaries as of December 1, 2009, with limit of liability of USD 75 million, at annual premium of USD 300,500, of which the Company's share amounts to USD 56,259 per annum. The Company may increase the limit of liability in the policy to a total of USD 100 million for additional annual premium in the amount of USD 55,625. B. To approve the Company contracting with Phoenix and/or any other insurer in an officers liability insurance policy, under the terms fixed in the resolution, from time to time, without requiring further approval of the general meeting, provided that the limit of liability of the insurance (in the collective policy) shall not be below USD 75 million and shall not exceed USD 100 million per event and per period and the annual premium will not exceed USD 450 per annum, with the addition of up to 15% per year. C. To approve the forgoing with regard to Mr. Elad Sharon (Tshuva), the son of the controlling shareholder, pursuant to the provisions of Regulation 5 of the Relief Regulation.

DELEK GROUP LTD.

Date: March 28, 2010

Signatories and their positions:

Gabriel Last – Chairman of the board of directors

Asi Bartfeld - CEO

Barak Mashraki – CFO

D-32 Regulation 26:

Director's Name: Primary occupation in the past 5 years: Gabriel Last

72 Kochav Hayam St., Address: Chairman of Delek Group board of directors. Hofit, 40295 Serves as a director in the companies: Delek 1946 Year of birth: Petroleum Ltd., Delek Capital Ltd., Delek Motors Ltd., Delek Automotive Ltd., Delek Investments 4787933 ID: and Properties Ltd., Delek Energy Ltd., A.D.C. 2003 Appointed on: Holdings Ltd., A.D.C. Properties Ltd., IPP Delek Ashkelon Ltd., Delek Natural Gas Marketing & Israeli Citizenship: Distribution Ltd., Delek the Israel Fuel Non- External director: Corporation Ltd., Delek Drilling Management LLB, Tel Aviv University Education: (1993), Ltd., Delek Energy International Ltd., Delek Energy Bonds Ltd., Gadot Biochemical Graduate of Social Industries Ltd., Avner Oil and Gas Ltd., and Sciences and Delek Fund for Education, Culture and Science. Mathematics, Haifa University; AMP (Executive Officer Management Program), Harvard University

The Chairman is an interested party in the Company Elad Sharon (Tshuva) Acting vice chairman of Delek Group's board of Address: 43 Yirmiyahu Street, Tel Aviv directors Year of birth: 1980 Serves as a director in the Group's subsidiaries: Phoenix Holdings Ltd., Republic Companies Inc., ID: 37336997 Delek Europe Holdings Ltd., Delek Natural Gas Appointed on: 13.8.2006 Marketing & Distribution Ltd. Citizenship: Israeli Provides management services in The Elad Group (USA) and Tashluz Investments and External director: Non- Holdings Ltd. (both subsidiaries owned by the Education: LLB Netanya Academic University; MBA, controlling shareholder) Tel Aviv University

The director is the son of the controlling shareholder The director is an interested party in the Company Yoseph Dauber Address: 8 Hakishon Street, Ramat Serves as a director in the companies: Nice Hasharon Systems Ltd., Vocaltec Technologies Ltd. (external director), Micro Medic Ltd. and Year of birth: 1935 Orbit Technologies Ltd., serves as ID: 007447584 Chairman of KCPS Manof fund. Appointed on: 01.01.2009 Previously, 2003-2008 served as director at Bank Hapoalim Ltd., and 2000-2002 served Citizenship: Israeli as co-CEO and vice chairman of Bank External director: Yes Hapoalim Ltd. management. Education: BA in economics and statistics, Hebrew University; MA in Law, Bar Ilan University

Member of the Audit Committee Director with accounting and financial expertise

D-33 Ben-Zion Zilberfarb Address: 10 Hatizmoret St., Kiryat Ono Professor of economics, Bar Ilan University, dean of the School of Banking and Capital Year of birth: 1949 Markets at Netanya Academic College ID: 30134605 Board member, Discount Bank (external Appointed on: (extended term) May 29, 2009 director), Perrigo (external director) Citizenship: Israeli Previously: Board member, Partner, Fundtech, Brimag Digital Age and Clal External director: Yes Provident and Study Funds. Education: PhD in Economics (Pennsylvania University, Philadelphia, USA)

Member of the Audit Committee Member of Balance Sheet Committee Director with accounting and financial expertise Avi Harel Address: 4 Esther Hamalkah St., Bnei Serves as a director in the companies: Brak Phoenix Holdings and Phoenix Insurance Co., Bank Hapoalim (Switzerland), Bank Year of birth: 1948 Hapoalim (Luxembourg), Poalim Capital ID: 030108195 Markets, Excellence Reit Fund, Mikal Group Appointed on: 29.5.06 Previously served as deputy CEO, Citizenship: Israeli manager of the finance division and IT External director: Non- systems, and board member – Bank Hapoalim Education: Economics and statistics graduate, Tel Aviv University; Mr. Harel served during the reporting period through August 10, 2008 as chairman of Diploma in economics, Tel Aviv University the subsidiary, Delek Europe Holdings Ltd.

Member of Balance Sheet Committee Director with accounting and financial expertise Mazal Bronstein Address: 8 Haharuv Street, Zichron Marketing of real estate projects Yaakov Director of Bet Shacham Ltd. and partner Year of birth: 1952 (14.5%) in a retirement home ID: 51245330 Appointed on: 1.4.2003 Citizenship: Israeli External director: Non-

Education: BA in political science and Middle East studies,

Haifa University

Member of the Audit Committee

D-34 Moshe Amit Address: 17 Hameurer, Givatayim Year of birth: 1935 Serves as a director on the board of directors of the Company, chairman of the ID: 1127885 board of directors of the subsidiary, Delek The Israel Fuel Corporation Ltd. Appointed on: 1.4.2004 Member of the boards of directors: Citizenship: Israeli Isracard, St. Lawrence Bank Barbados, External director: Non- Poalim Capital Markets for Investments Ltd., Tempo Beer Industries Ltd., and Blue Education: »BA in social sciences Square Properties and Investments, Global and sociology, Bar Ilan Factoring, AFI Development P.L.C,

University CYPRVS

Former co-CEO of Bank Hapoalim, Acting CEO of Bank Hapoalim. Member of Balance Sheet Committee Director with accounting and financial expertise

Regulation 26A

Additional senior office holders Asi Bartfeld Year of birth: 1952 CEO of Delek Group Ltd., CEO of Delek Investments & Properties Ltd. and board member of Delek Group ID: 65474108 subsidiaries. Phoenix Insurance Co., Phoenix Citizenship: Israeli Holdings Ltd., Delek Petroleum Ltd., Gadot Biochemical Industries Ltd., Avner Oil and Gas Ltd., Appointed on: 4.9.2003 Delek Energy Ltd., Delek and Avner Yam Tethys Ltd., Position: CEO Delek Capital Ltd., Delek Drilling Management (1993), Education: BA Economics, Tel Aviv Ltd., IPP Delek Ashkelon Ltd., Delek Energy University International Ltd., Delek Energy Bonds Ltd. Delek Investments and Properties Ltd., Delek Automotive Ltd., Delek Natural Gas Marketing & Distribution Ltd., Delek US Holdings Inc., and IDE Technologies Ltd. The officer is an interested party in the Company

Liora Pratt Levin Year of birth: 1962 Serves as VP and chief legal counsel and Company secretary of Delek Group Ltd. ID: 57906919 Director of the Group’s subsidiaries Gadot Citizenship: Israeli Biochemical Industries Ltd., IDE Technologies Ltd., Appointed on: 1.4.2007 Delek Europe Holdings Ltd., and Delek Energy Ltd. Position: VP, Legal counsel and Previously served as legal counsel of Delek Group Company secretary Ltd. and its subsidiaries Education: BA in Political Sciences, Tel Aviv University LLB, University of Reading, UK Barak Mashraki Year of birth: 1973 Serves as CFO of Delek Group Ltd. ID: 029714086 Director in other companies: Delek Petroleum Ltd., Delek The Israel Fuel Corporation Ltd., Delek Citizenship: Israeli Automotive Ltd. and subsidiaries of the Company. Appointed on: 1.1.08 Previously served as controller at Delek Group Ltd. Position: CFO (2006-2008) and senior auditor in Kost Forer Gabbay

D-35 Education: Accounting and economics, & Kasierer / Lubovitch Kasierer (2000-2006) Bar Ilan University Michael Grinberg Year of birth: 1955 Serves as internal auditor of Delek Group Ltd. and its subsidiaries: Delek Petroleum Ltd., Delek Automotive ID: 069108231 Ltd., Delek Energy Ltd., Delek Drilling Management Citizenship: Israeli (1993), Ltd., Avner Oil and Gas Ltd. Appointed on: 1.1.2002 Position: Internal auditor Education: Accounting and economics, Tel Aviv University

Regulation 26A

Senior officers of subsidiaries who are defined as senior officers in the Company under Regulation 35 of the Securities Law Avshalom Halevi Felber Year of birth: 1963 ID: 058370412 Serves as CEO of the subsidiary, IDE Technologies Ltd. since 2002. Citizenship: Israeli Appointed on: 16.06.2002 Position: CEO, IDE Technologies Ltd. Education: Degrees in economics and philosophy, Jerusalem Hebrew University; Diploma in MBA specializing in financing and employee relations, Jerusalem Hebrew University Uzi Yamin Year of birth: 1968 Serves as CEO of the subsidiary, Delek US Holdings ID: 024035743 Inc. and director of its subsidiaries since 2001. Citizenship: Israeli Appointed on: 01.11.2001 Position: CEO of Delek US Holdings Inc. Education: LLB graduate, Jerusalem Hebrew University; Diploma in MBA Jerusalem Hebrew . University; Accounting

Dani Guttman: Year of birth: 1970 ID: 313790123 Serves as CEO of the subsidiary, Delek Capital Ltd., CEO and chairman of the board of directors of Delek Citizenship: Israeli and Swedish Finance US Inc., Chairman of the board of directors of Appointed on: 15.03.2006 Republic Companies Inc., Director of Phoenix Holdings Ltd., Director of Phoenix Insurance Co. Ltd., Position: CEO, Delek Capital Ltd. Director of Barak Capital Ltd. Education: BA and Diploma in Previously served as CEO of Clal Finance between Economics and Business 2004 and 2006 Management, Stockholm School of Economics

D-36 Hod Gibsu Year of birth: 1969 ID: 024481848 Serves as CEO of the subsidiary, Delek Europe Holdings Ltd., director at Delek Benelux B.V., director Citizenship: Israeli at Delek Energy Ltd. Appointed on: 15.02.2006 Previously served as VP at Delek The Israel Fuel Position: CEO, Delek Europe Holdings Corporation Ltd. (2001-2006) Ltd. Education: BA in economics and MBA, Bar Ilan University

Zvi Grinfeld Year of birth: 1947 ID: 004289070 Serves as CEO and a director of the subsidiary, Delek Drilling Management (1993) Ltd., and as a director in Citizenship: Israeli the companies: Gadot Biochemical Industries Ltd., Appointed on: 25.07.1993 Delek Infrastructures Ltd., Delek US Holdings Inc., and DelKol Ltd. Chairman of the board of directors of Position: CEO, Delek Drilling Delek Refining Ltd. Management (1993) Ltd. Previously served as VP at Delek The Israel Fuel Education: Chemical Engineering, Corporation Ltd. Technion, Haifa; MBA, Tel Aviv University Gil Agmon Year of birth: 1961 Serves as CEO of the subsidiary, Delek Drilling Automotive Ltd., and as a director in the companies: ID: 057061822 Delek Motors Ltd., Delek Motors Spare Parts (1987) Citizenship: Israeli Ltd., and DMR Properties (1995) Ltd. Appointed on: 02.08.1998 Position: CEO, Delek Automotive Ltd. Education: BA in Economics, Tel Aviv University Gideon Tadmor Year of birth: 1963 ID: 057995755 Serves as CEO of the subsidiary, Delek Energy Ltd., and VP at Avner Oil and Gas Ltd., Chairman of the Citizenship: Israeli board of directors of Delek Drilling Management Appointed on: 23.01.2001 (1993) Ltd. Position: CEO, Delek Energy Ltd. Also serves as a director of Cohen Development and Industrial Buildings Ltd. and its subsidiaries. Education: BA LLB, Tel Aviv University

Eyal Lapidot Year of birth: 1965 ID: 022030159 Serves as CEO of the subsidiaries, Phoenix Holdings Ltd. and Phoenix Insurance Co. Ltd. Citizenship: Israeli Previously served as CEO at Delek The Israel Fuel Appointed on: 01.06.2009 Corporation Ltd. (2005-2009) and CEO at Direct – IDI Position: CEO, Phoenix Holdings Ltd. Insurance Co. Ltd. (2001-2005) and Phoenix Insurance Co. Ltd. Education: BA Economics and Accounting, Jerusalem Hebrew University; MBA Diploma Jerusalem Hebrew University; Accounting

D-37 David Kaminitz Year of birth: 1953 ID: 051736528 Serves as CEO of the subsidiary, Delek The Israel Fuel Corporation Ltd., and as a director in its Citizenship: Israeli subsidiaries. Appointed on: 01.06.2009 Previously served as CEO HOT Communications Position CEO, Delek The Israel Fuel Systems Ltd. (2006-2008) and CEO at Barak 013 Company Ltd. (2002-2006) Education: Electronic Engineering, Computer Engineering, Computer Science, Jerusalem Hebrew University

The directors, senior officers and senior officers of the subsidiaries are not relatives of other senior officers in the Company, or of an interested party, other than Mr. Elad Sharon (Tshuva), deputy chairman of the board of directors, who is the son of the Company’s controlling shareholder.

D-38